Kenyan banking sector study Phase I · uncompetitive market structure creates market power with the possibility that one or more firms in the market have the ability to raise prices

Legally Privileged and Confidential

Kenyan banking sector study –

Phase I

Legally Privileged and Confidential 7 October 2014

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Document Reference: Final

Date: 7 October 2014

Contact Information

Genesis Economic Consulting (Pvt) Ltd

Office 702

7th Floor

International Trade Tower

Nehru Place

New Delhi – 110019

Tel: +91 11 4955 3300

www.genesis-analytics.com

Authors

Genesis Analytics

Contact Person

Geeta Singh

[email protected]

mailto:[email protected]

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Table of Contents

EXECUTIVE SUMMARY ............................................................................... 1

1. INTRODUCTION ..................................................................................... 9

2. OVERVIEW OF THE KENYAN BANKING INDUSTRY ........................ 11

2.1. Growth in the industry ........................................................................... 12

2.2. Regulatory environment ........................................................................ 13

3. APPROACH FOLLOWED FOR THE MARKET INQUIRY .................... 16

4. MARKET SEGMENTS AND PRODUCTS ............................................. 18

4.1. Market segments .................................................................................. 18

4.2. Products ............................................................................................... 19

5. ANALYSIS OF MARKET STRUCTURE ............................................... 24

5.1. Market Concentration ........................................................................... 24

5.1.1. Concentration in different market segments and products ...................... 29

5.1.2. Concentration in counties in Kenya .......................................................... 47

5.1.3. Conclusion ................................................................................................ 50

5.2. Barriers to entry and expansion ............................................................ 50

5.2.1. Entry barriers from regulatory requirements ............................................ 50

5.2.2. Other barriers to entry and expansion...................................................... 52

5.3. Buyer power ......................................................................................... 55

5.4. Conclusions on Market structure ........................................................... 55

6. INTEREST SPREAD ANALYSIS .......................................................... 59

6.1. International comparison ....................................................................... 59

6.2. Interest spread analysis for Kenyan banks............................................ 60

6.2.1. Analysis of lending and deposit rates ....................................................... 63

6.3. Lending and deposit spreads and concentration ................................... 67

7. PROFITABILITY ANALYSIS ................................................................. 70

7.1. Financial ratio analysis for Kenyan banks ............................................. 70

7.2. International comparison ....................................................................... 75

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8. CONCLUSIONS AND PHASE 2 TASKS .............................................. 77

9. POLICY RECOMMENDATIONS ........................................................... 81

APPENDICES .............................................................................................. 83

Appendix A: Regulatory Environment and Changes ....................................... 83

Appendix B: Lending and deposit by bank as of December 2013 ................... 91

Appendix C: Lending and deposit by bank as of December 2012 ................ 101

Appendix D: Risk spread by bank as of December 2013 .............................. 109

Appendix E: Risk spread by bank as of December 2012 .............................. 118

Appendix F: Profitability by bank for 2013 .................................................... 128

Appendix G: Profitability by bank for 2012 .................................................... 129

Appendix H: Calculation of cost of equity ..................................................... 131

List of Figures

Figure 1: Total loans and deposits in Kenyan banking industry from 2010-2013 (in Ksh Million) ..................................................................................................................................... 12 Figure 2: Share of corporate, SME and personal segments in the Kenyan banking industry 19 Figure 3: Share of overdrafts and term loans in the Kenya banking industry ........................ 22 Figure 4: Share of overdrafts and term loans in the Kenya banking industry ........................ 22 Figure 5: Market share in total lending and deposits .............................................................. 27 Figure 6: Market share of MFBs based on total loans issued by them .................................. 28 Figure 7: Market share in corporate lending ........................................................................... 31 Figure 8: Market share in corporate deposits ......................................................................... 31 Figure 9: Market share in corporate overdraft lending ........................................................... 32 Figure 10: Market share in corporate term loans.................................................................... 33 Figure 11: Market share in corporate demand deposits ......................................................... 33 Figure 12: Market share in corporate saving deposits ........................................................... 34 Figure 13: Market share in corporate term deposits ............................................................... 35 Figure 14: Market share in SME lending ................................................................................ 36 Figure 15: Market share in SME deposits .............................................................................. 36 Figure 16: Market share in SME overdraft lending ................................................................. 37 Figure 17: Market share in SME term loans ........................................................................... 37 Figure 18: Market share in SME demand deposits ................................................................ 38 Figure 19: Market share in SME saving deposit ..................................................................... 39 Figure 20: Market share in SME term deposits ...................................................................... 40 Figure 21: Market share in personal lending .......................................................................... 40 Figure 22: Market share in personal deposits ........................................................................ 41 Figure 23: Market share in personal overdrafts ...................................................................... 41 Figure 24: Market share in personal term loans ..................................................................... 42 Figure 25: Market share in personal demand deposits .......................................................... 43 Figure 26: Market share in personal saving deposits ............................................................. 43 Figure 27: Market share in personal term deposits ................................................................ 44 Figure 28: Market share in mortgage loans ............................................................................ 45 Figure 29: Market share in consumer durable loans .............................................................. 46 Figure 30: Market share in credit cards amount utilised ......................................................... 46 Figure 31: Lending HHI by county .......................................................................................... 47 Figure 32: Deposit HHI by county ........................................................................................... 48

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Figure 33: Yield curve for the Kenyan banking industry in December 2013 .......................... 64 Figure 34: Excess returns for 117 countries ........................................................................... 76

List of Tables

Table 1: Total assets, loans and deposits in Kenyan banking industry (in Ksh Million) ......... 11 Table 2: Products offered by banks to various market segments and their description ......... 20 Table 3: Banks that gave consent .......................................................................................... 25 Table 4: Banks for which total deposits and loans were obtained from publically available sources ................................................................................................................................... 26 Table 5: Comparison of loans by MFBs and by the commercial banks ................................. 28 Table 6: Geographic reach of Kenyan banks in terms of branches and sub-branches, agencies and ATMs ................................................................................................................ 48 Table 7: International comparison of regulatory requirements to run/start-up a bank ........... 51 Table 8: Concentration summary for market segments ......................................................... 56 Table 9: Concentration summary for products within market segments ................................ 57 Table 10: Summary of concentration results for specific lending products ............................ 57 Table 11: Key banking sector indicators for Kenya and comparable countries ..................... 60 Table 12: Lending – deposit by tenor for the Corporate segment .......................................... 61 Table 13: Lending – deposit by tenor for the SME segment .................................................. 61 Table 14: Lending – deposit by tenor for the Personal segment ............................................ 61 Table 15: Lending spread in the Kenyan banking industry for local currency transactions ... 65 Table 16: Lending spread in the corporate segment .............................................................. 65 Table 17: Lending spread in the SME segment ..................................................................... 65 Table 18: Lending spread in the personal segment ............................................................... 66 Table 19: Deposit spread for corporate segment ................................................................... 66 Table 20: Deposit spread for SME segment ........................................................................... 67 Table 21: Deposit spread for personal segment..................................................................... 67 Table 22: Summary of spreads and concentration ................................................................. 69 Table 23: NII margin for Kenyan banks in 2012 and 2013 ..................................................... 71 Table 24: NIR margin for Kenyan banks in 2012 and 2013 ................................................... 72 Table 25: Cost to income ratio for Kenyan banks in 2012 and 2013...................................... 72 Table 26: Net profit margin and ROE for Kenyan banks in 2012 and 2013 ........................... 73 Table 27: Financial leverage and asset turnover for Kenyan banks in 2012 and 2013 ......... 73 Table 28: Profitability summary .............................................................................................. 75 Table 29: Summary of Phase 2 tasks ..................................................................................... 80 Table 30: Summary of Policy Recommendations................................................................... 82 Table 31: Minimum capital requirements as defined in the Prudential Guidelines, 2013 ...... 85 Table 32: List of licensed MFBs in Kenya .............................................................................. 87 Table 33: Microfinance regulations - key requirements .......................................................... 87 Table 34: Lending and deposit by market segment ............................................................... 91 Table 35: Lending and deposit by bank as of December 2013 (in KSH 000) ........................ 93 Table 36: Lending and deposit by bank as of December 2013 (in KSH 000) ........................ 95 Table 37: Lending and deposit by bank as of December 2013 (in KSH 000) ........................ 96 Table 38: Lending in specific categories as of December 2013 (in KSH 000, Residential mortgages in KSH million) ...................................................................................................... 98 Table 39: Lending and deposit by bank as of December 2012 (in KSH 000) ...................... 101 Table 40: Lending and deposit by bank as of December 2012 (in KSH 000) ...................... 103 Table 41: Lending and deposit by bank as of December 2012 (in KSH 000) ...................... 105 Table 42: Lending in specific categories as of December 2012 (in KSH 000) ..................... 107 Table 43: Risk free rate in Kenya as of 31 December 2013 ................................................. 109 Table 44: Lending spread by bank as of December 2013 in the corporate segment........... 109 Table 45: Deposit spread by bank as of December 2013 in the corporate segment ........... 110 Table 46: Lending spread by bank as of December 2013 in the SME segment .................. 112 Table 47: Deposit spread by bank as of December 2013 in the SME segment ................... 113 Table 48: Lending spread by bank as of December 2013 in the personal segment ............ 115 Table 49: Deposit spread by bank as of December 2013 in the personal segment............. 116 Table 50: Lending spread by bank as of December 2012 in the corporate segment........... 118 Table 51: Average lending spread of top 4 and the other banks in the corporate segment 119

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Table 52: Deposit spread by bank as of December 2012 in the corporate segment ........... 119 Table 53: Average deposit spread of top 4 and the other banks in the corporate segment 121 Table 54: Lending spread by bank as of December 2012 in the SME segment .................. 121 Table 55: Average lending spread of top 4 and the other banks in the SME segment ........ 122 Table 56: Deposit spread by bank as of December 2012 in the SME segment ................... 122 Table 57: Average deposit spread of top 4 and the other banks in the SME segment ........ 124 Table 58: Lending spread by bank as of December 2012 in the personal segment ............ 124 Table 59: Average lending spread of top 4 and the other banks in the personal segment .. 125 Table 60: Deposit spread by bank as of December 2012 in the personal segment............. 126 Table 61: Average deposit spread of top 4 and the other banks in the personal segment .. 127 Table 62: Profit ratios by bank for 2013 ................................................................................ 128 Table 63: Profit ratios by bank for 2012 ................................................................................ 129

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EXECUTIVE SUMMARY

This report presents the findings of Phase 1 of the first detailed study of competition in the

Kenyan Banking Sector commissioned by the Competition Authority of Kenya with the support

and participation of the Central Bank of Kenya, and the Financial Sector Deepening Trust.

Virtually all the licensed banks in Kenya contributed data to the study and engaged with the

study team1.

Although the banking sector overall is profitable and has been growing steadily, there has

been considerable debate regarding the prevailing level of interest rates, and a commonly held

view that lending rates, and the spread between lending and deposit rates in Kenya, are

unreasonably high, with the burden on consumers intensified by the high levels of bank fees. A

number of potential hypotheses have been presented for these outcomes including the lack of

competition between banks, which is what this study seeks to address.

The analysis applies methodologies that have been developed by competition authorities

around the world to study whether the market structure of the banking sector is resulting in

market outcomes or practices that are to the detriment of consumers. In theory an

uncompetitive market structure creates market power with the possibility that one or more firms

in the market have the ability to raise prices above a competitive level.

The study thus commenced with an analysis of the composition and structure of the sector to

determine the appropriate way to define the market – and to study the level of concentration

within the overall and sub-segments of the market. The approach segmented the market

between licensed commercial banks and micro-finance banks, and between the products that

are provided to corporate, smaller businesses and retail customers that cover both deposit

products (liabilities) and assets (loans). Given the data that is available, we have considered

five products for the corporate, small and medium enterprises (SME) and personal market

segments and for analysing concentration - two on the lending and three on the deposit side

(overdrafts and term loans; and demand deposits, saving deposits and term deposits). In

addition, we have examined data on three lending products – mortgages, consumer durables

and credit cards. Finally we also examine geographic concentration of banks across counties.

The approach involves examining three key features of each market to determine its

competitiveness:

Level of concentration. If one or a few firms have a large share of the market, the

market is said to be concentrated. These firms can then act independently of the other

firms and may thus have the market power to raise prices above competitive levels. A

1 The data used for the analyses presented in our report largely comes from the monthly submission by Kenyan banks

to the Central Bank of Kenya (CBK). The submissions include data on loans and advances by customer segments and products; data on the geographical distribution of a bank’s branches, profit and loss statements as well as balance sheets. Of the 43 commercial banks in Kenya, we have data for 33 banks as the remaining banks did not give consent to the CBK to share their submitted data for the purpose of the market inquiry. These 33 banks constitute 82.5 per cent of total deposits by commercial banks and 72.4 per cent of loans and advances. Given these large percentages, we believe that our conclusions are unlikely to be distorted due to lack of data. Since lending and deposit data at the product level was publically available for Commercial Bank of Africa, Co-operative Bank of Kenya and Chase Bank, they have been included in the concentration analysis by making appropriate assumptions where needed. Thus our concentration analysis is based on data for 36 banks. Our report focuses on data as of December 2013.

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widely used measure of the level of concentration in a market is the Herfindahl-

Hirschman Index (HHI), calculated as the sum of the squares of the individual market

shares of all firms in a market. For example, in a market which consists of a single

firm, the HHI would be 10,000. We use the United States (US) Department of Justice

and the Federal Trade Commission guidelines to broadly classify markets into

unconcentrated (HHI below 1500), medium (HHI between 1500 and 2500) and highly

concentrated (HHI above 2500) markets. The concentration analysis is done for

product markets and geographic markets.

Entry barriers. Entry barriers are the constraints on firms in entering a market. A

market with no entry barriers can be competitive even with high concentration since

the threat of entry by new players constrains the behaviour of existing firms.

Countervailing buyer power. Countervailing buyer power refers to the power that

buyers, individually or as a group, may have to determine market outcomes. Even in a

situation of high concentration and entry barriers, the market structure may be

competitive if the buyer has the market power to match the market power of the seller

through aggressive negotiations.

Having assessed the market structure for each of these segments the study proceeded to

assess the interest margins earned in each product/segment, as well as a consideration of the

other indications of competitive conditions, namely bank profitability.

Concentration

The Kenyan banking sector with total assets of around Kenyan Shilling (KSH) 2.5 trillion is the

largest in East Africa. It currently comprises 43 licensed banks, one housing finance company,

and nine licensed microfinance banks (MFBs).

With over 40 banks operating in the market the overall market appears to be competitive, and

at an overall industry level, no one bank appears to be dominant in either lending or deposits.

Kenya Commercial Bank had the highest share in deposits as well as in lending (13 per cent in

both). Based on the market shares in deposits and lending, the respective HHIs were

calculated to be 607 and 643 respectively, implying that both overall deposits and overall

lending would be classified as unconcentrated per the US guidelines.

The corporate segment, the largest segment for both loans and deposits, has several players

for both lending and deposits. With HHIs of 709 and 1149 for corporate lending and deposits

respectively, these market segments are also found to be unconcentrated. HHI calculations for

overdraft and term loans show that the markets for both these lending products are

unconcentrated. On the deposit side, demand and term deposits are unconcentrated but

corporate savings are moderately concentrated given the HHI of 2492. It is to be noted that

corporate savings are a small fraction of total corporate deposits.2

The SME segment includes banking transactions with non-corporate businesses that range

from relatively large entities, which are similar to those considered in the corporate segment, to

2Although our results largely reflect regulatory returns provided to the banks to the Central Bank of Kenya and thus

should be accurate, small changes in the way that banks have classified their products can result in significant shifts in category, that may or may not be material to their customers. Thus most banks offer demand deposits, some of which pay interest, some of which have been classified according to tenure and are thus included in demand deposits. Other banks have chosen to report demand or near demand deposits that pay interest as savings accounts. Without further investigation we are unable to determine whether this classification is material to customers or competitive conditions in the segment.

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fairly small businesses, which may be closer to the clientele of the microfinance sector. The

HHI for SME lending and deposits is 1006 and 849 respectively. In addition to SME lending

and deposits being unconcentrated, SME overdrafts and term loans are also unconcentrated,

as are SME demand and term deposits. But SME savings are highly concentrated with an HHI

of 3125. However, again SME savings are a small percentage of total SME deposits3.

The personal segment is also unconcentrated with HHI of 988 and 770 for lending and

deposits respectively. As with the corporate and SME segments, personal overdrafts, term

loans, demand deposits and term deposits are unconcentrated. However savings accounts

appear to be highly concentrated with an HHI of 3008. Unlike the corporate and SME

segments, however, savings are a reasonably large proportion of total personal deposits.

Our analysis of concentration in mortgage lending, consumer durables and credit cards

indicates that the latter two are highly concentrated, with one bank accounting for 63 per cent

of the market in consumer durable loans. Although credit card lending appears concentrated

they account for a very small proportion of total loans.

Thus the overall conclusion from the market concentration analysis supports our initial

observation – with over forty banks in the market the technical measures of concentration for

most products and segments do not suggest a concentrated market that would allow

participants to exercise pricing power. We do however find concentration in five areas –

corporate, SME and personal savings, and consumer durable loans and credit card lending.

For corporate savings, the buyer power of large corporate customers makes this segment

competitive despite high concentration. Although the markets for credit card and consumer

durables are concentrated, this may not reflect uncompetitive market structures since there

appear to be no apparent barriers to entry in these specific lending markets. It should be noted

that Phase 1 did not consider the market for vehicle and asset finance.

Barriers to entry

While market shares and concentration are an important component of the market structure

assessment, they are not the end of the story. Low entry barriers in a market act as a

competitive constraint on incumbents if a market is concentrated. Our analysis shows that the

regulatory requirements for the Kenyan banks are not very different from the requirements in

comparable countries and generally could be considered less onerous: given the size of the

economy, minimum capital requirements are lower and an enlightened regulatory approach

has encouraged the growth of new channels for mobile payments, and microfinance banks that

can form a low cost entry into the sector. Nonetheless there may still be barriers to entry that

arise due to barriers to expansion – large economies of scale in the industry make it difficult for

small banks to compete effectively with the big banks particularly given the importance to

customers of a large branch network, which can be a costly to create.

In this light, we examined concentration at the county level because competition between

banks can be local, especially in the SME and personal banking segments. The geographic

market concentration analysis points to most counties being highly concentrated but these

counties account for less than 10 per cent of total loans or deposits. Majority of the counties

have at least 6 banks. But only a few large banks are present in most of the 47 counties; most

banks have a presence in fewer than 20 counties.

3 See the comments under footnote 2.

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In Kenya the lack of inter-operability in the payment system amplifies this constraint, although

the regulations that promote agency banking should make a difference. A lack of transparency

in prices may also make it difficult for most consumers to shop around for the cheapest loan.

However these issues are no different from those faced by the banking industry in other

countries, and the CBK is aware of this and has taken steps to legislate standard interest rate

disclosure rules that if effectively enforced should empower consumers to make improved

decisions. More importantly, the Kenyan financial services sector is well known for its growth

and dynamism. The fact of new players entering the Kenyan banking industry, in particular the

entry and rapid growth of Equity Bank from a building society to one of the largest banks,

strongly indicates that these barriers may not be insurmountable. As in other countries,

countervailing buyer power only exists in the corporate segment.

Thus our analysis of barrier to entry suggests that although there are aspects of the banking

industry that seem to result in a concentrated market in most countries4, the market structure

of the Kenyan banking industry has lower barriers to entry than most and an enlightened

regulatory model promotes new entrants and new forms of competition.

Interest Rate Analysis

Given the concerns regarding lending rates and interest spread in Kenya, and the fact that

there are some segments and product markets where concentration is high, we have also

analysed the interest rates charged or paid by the Kenyan banks.

Whereas interest rate spreads are strongly influenced by macro-economic conditions making

cross country comparisons difficult, we used World Bank data to compare the interest rate

spread in Kenya with that in other countries. According to this data, the interest rate spread in

Kenya was 8.2 per cent in 2012. In comparison, the average spread for 23 countries in Sub-

Saharan Africa, for which data on interest rate spreads was available, was 11.2 per cent.

Comparing Kenya’s interest spread to that in countries at a similar stage of financial

development, data for 2011 shows a 9.4 per cent spread in Kenya and an average 7.1 per cent

for this group of similar countries – neither results indicating any particular cause for concern.

While the public discourse on interest rates in Kenya has focussed on aggregate spreads, a

disaggregated analysis of interest rates is more appropriate to determine if the lending rates

are high or the deposit rates are low. Further, differences in (i) tenor of loan/deposit and (ii)

credit ratings of borrowers/safety of banks need to be considered as a determinant of pricing,

not just concentration.

To assess market power in the lending and deposit markets, we analyse the spread of lending

rates and deposit rates over the risk-free rate – the lending spread and deposit spread. If the

lending spread for one bank is higher than for another bank with similar credit risk, this could

indicate market power, all else being equal (similarly for deposit spreads). We used the yield

curve in the Kenyan financial market to calculate the risk free rate for different tenors. Lending

and deposit spreads for the four largest banks in a given segment-product category are

compared to the spreads for the other banks in the same category to assess impact of market

power.

The analysis of lending spread shows that spreads for overdraft and term loans are not higher

for the top four banks compared to other banks in the corporate and SME segments (except

4 Consumers of banking services seek safety in large banks and brands, and banks that have nationwide footprints,

and the balance sheets to support their needs – be it large loans for corporates or mortgages for individuals

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for the 0-3 month tenor in the SME segment). However, in the personal segment, average

lending spreads for the top four banks are higher in all categories. The analysis of deposit

spread shows that spreads for demand and saving deposits are not lower for the top four

banks compared to other banks in the corporate segments, but they are lower in the SME and

personal segments. Further, the deposit rate offered by the top four banks is lower than the

average of other banks for term deposits of specific tenors across market segments.

In order to determine whether these outcomes are a result of a lack of competition in particular

markets, we link spreads to concentration in each market. In markets where we observe a

higher lending rate/lower deposit rate for the bigger banks, but are unconcentrated, it is

unlikely that the observed interest rates are a result of a lack of competition. However, in

markets where one observes such rates for the big banks along with a high degree of

concentration, it is plausible that lack of competition, among other factors, is resulting in the

observed rates. In these cases one needs to isolate the effect of factors such as risk and

market concentration on rates in order to determine if there is anticompetitive conduct.

The table below shows that the markets on the lending side where the average lending spread

for the top four banks is higher than the other banks (personal overdrafts and term loans, and

SME term loans for the 0-3 month tenor) are unconcentrated. On the deposit side, in most

cases the deposit rate of the top four banks on average was lower than that of the other banks.

But the corresponding markets are unconcentrated except for SME and personal savings. In

these two markets, a high degree of concentration could be driving the below average deposit

spread. However, it is important to remember that this outcome could also be driven by the fact

that the top four banks in these cases are large banks which are perceived to be safer by

depositors and can therefore attract deposits despite offering lower deposit rates.

.

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Summary of spreads and concentration

In conclusion, while the high level of concentration in some segments could be playing a role

there is no clear relationship between concentration and spreads that indicates market power.

Profitability Analysis

Finally we conducted an analysis of profitability within the sector to determine whether there is

evidence of super/excess profitability in the market.

An international comparison of excess returns, defined as ROE minus the cost of equity,

shows that Kenya’s banking sector ranks 23rd out of a sample of 117 countries, earning

excess returns of 6 per cent. One can note that this would place Kenya somewhere in between

Ghana and Uganda, and considering Kenya’s GDP and income level this ranking does not

seem abnormal.

Within Kenya, the data suggests that in 2013 small and large banks had similar net profit

margins. In fact, all banks in Kenya made a positive profit in 2013 with the exception of

Ecobank. In terms of ROE, smaller banks experienced lower returns in 2012 and 2013,

however, the gap closed significantly in 2013. The main driver for high ROE of large banks is

the higher revenues per asset (from the asset turnover) for the two years. The larger banks are

likely to be considered safer, allowing them to pay lower deposit rates, while attracting greater

current account and saving account deposits. These factors together would allow the large

banks to earn higher ROE. Other factors that may contribute to this observed outcome are

higher fees being charged by large banks and lower deposit rates paid by the large banks in

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the savings deposits market due to the market structure but further analysis is needed before

coming to a conclusion.

Phase 1 Conclusions and policy implications

A competition market inquiry seeks to determine whether concentration in a market (and the

relevant sub-markets) create conditions in which market participants can use market power to

increase prices to consumers. As such it does not seek to directly answer the question as to

whether consumers pay too much for their services, only whether there is a possibility that

consumers are paying too much as a result of the market power arising from a concentrated

market or a market in which barriers to entry allow incumbents to exert market power, such

that regulators should intervene. The first phase of this report found little evidence that margins

or profits in the banking industry are at the top or bottom of peer group country comparisons,

nor did we find evidence of high levels of concentration at an industry or sub-industry level

using the standard approaches that have been adopted by competition authorities around the

world. To the contrary we find that the formal and regulatory barriers to entry into the sector

are probably lower than comparator countries, which have enabled the emergence and growth

of vibrant new participants in the market. We do nonetheless find evidence of concentration in

some segments of the market although this may partially be the result of definitional issues

and the way in which different banks have reported their products to the Central Bank – a

matter that needs to be investigated further in Phase 2.

As is clear from the data presented in the main report, although the standard industry

concentration measures do not suggest cause for concern, in most segments the market is

dominated by between 4-5 large players and a large number of very small players. The large

number of small banks in Kenya may in itself allow for some expression of market dominance

although this is not picked up by the formal calculations. The fact that smaller banks are less

profitable may mean that they struggle to make the investments necessary to compete and will

continue to lose market share. Increasing capital requirements to reduce the number of banks

is thus sometimes hypothesised as a way of increase effective competition within the sector,

but needs to be approached with extreme caution as rapid consolidation can result in some

very unhappy and unsustainable mergers as occurred in Nigeria.

There are nonetheless measures that can be promoted that can make the industry more

competitive. In particular creating a greater degree of inter-operability within the payment

system and ensuring that the prices at which the customers of smaller banks access the

payments system are not disadvantageous can promote competition. Equally ensuring the

depth and quality of public information on borrowers through the credit bureaus ensures that

banks can compete more effectively for customers. Finally, another intervention that will

enhance competition would be reducing the hurdles for customers to switch banks.

Establishing an appropriate code of conduct to ensure that the bank which is losing any facility,

such as the credit facility of a customer, acts with appropriate speed and diligence, and

potentially outlawing early repayment penalty fees are appropriate regulatory interventions.

However, further field research to confirm current practices is needed before any such

intervention.

Tasks to be addressed in Phase 2

While this study has enabled us to draw broad conclusions on competition in the Kenyan

banking industry, some issues remain unresolved which will be addressed in Phase 2 of the

market inquiry.

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In most countries fee income can amount to up-to a third of the income banks receive,

and conversely a third (or more for some consumers) of the cost of banking. The data

available to us provides information on total fee but does not provide details on the

services for which the fees were being charged and the magnitude of each type of fee.

Understanding the range of fees and manner in which fees are determined within the

banking industry has been the focus of a number of market inquiries across the world

and will be applied to the Kenyan market.

Whereas Kenya is a market leader in mobile payment services, the Mpesa service

constitutes a specific category of payment service/deposit product with a very high

concentration/market share. The determination of fees within the Mpesa service and

between Mpesa and other payment services will need to be specifically investigated.

Since our analysis has indicated high concentration in saving deposits, along with

potential barriers to entry and expansion, the segment requires more detailed analysis.

Reasons for high concentration in this market should be understood, particularly in

light of the fact that the other two deposit markets – demand and term deposits – are

not concentrated. As personal savings form a large part of personal deposits, and this

is a segment directly affecting many consumers, Phase 2 of this inquiry will examine

this segment in more detail, and in particular whether the apparent concentration is

material or as a result of the way in which different banks have classified their products

in their regulatory returns, or specific customer choices – namely the distribution of

Government accounts.

Phase 2 will include the examination of certain categories of lending that were

excluded from the initial analysis – in particular vehicle and asset finance.

Examining lending and deposit spreads after incorporating information on credit

ratings of a bank’s borrowers and the financial strength/credit rating of the bank will

address the question whether spreads are driven by the underlying credit risk and

maturity or by market power.

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1. INTRODUCTION

1. An efficient and growing financial sector is critical for the growth and development of an

economy as it provides a mechanism to channel savings into productive investment.

Banks are considered to be the most important institution through which financial services

are provided.

2. In Kenya too, the growth and deepening of the financial sector is considered key to the

development of the economy. As part of Vision 2030, which is Kenya’s development

programme, the financial sector is one of the six key sectors that have been designated

as economic pillars for Kenya’s growth.5 Ensuring that businesses and individuals get

access to credit at a low cost is an important policy objective of the Kenyan government.

3. The banking industry in Kenya has grown steadily in the last few years.6 This growth has

been accompanied by intense discussions and debates regarding prevailing interest

rates. The general perception is that lending rates and the spread between the lending

and deposit rates in Kenya have been high, although clear benchmarks have not been

noted. This has led to suggestions of regulation of interest rates and spreads. In addition,

high fees for banking services and a lack of transparency in the fee structure have also

been noted. While there has been no definitive explanation for these phenomena, a

number of potential hypotheses have been presented including:

3.1. High operational costs being passed through to consumers

3.2. Information asymmetry in the market

3.3. High risk profiles of individuals and business

3.4. Lack of competition between banks

4. Competition between banks is expected to reduce the cost of credit for consumers as

banks have an incentive to charge a low lending rate to attract more customers. However,

this occurs only when a consumer has several options and can choose the bank which

offers the lowest rate of interest for a loan, all else being the same. Similarly, banks will

offer higher returns on deposits if they have to compete for deposits from consumers. If

competition is not adequate, this can lead to higher lending rates and lower deposit rates,

resulting in a high interest rate spread.

5. In order to better understand the extent of competition between banks in Kenya, the

Competition Authority of Kenya (CAK), in partnership with the Financial Sector Deepening

(FSD), Kenya, has launched a market inquiry on competition in Kenya’s banking industry.

Genesis Analytics has been selected by the CAK and FSD to conduct this inquiry. The

objectives of this study, as per the terms of reference, are as follows:

5.1. Assess the market structure of the sector;

5.2. Identify potential barriers to competition, if any, and consumer protection concerns

that may be alive in the sector;

5 http://www.vision2030.go.ke/index.php/pillars

6 World Bank. 2013. Reinvigorating growth with a dynamic banking sector.

10


5.3. Engage the National Treasury, Commercial Banks, Microfinance Banks, Kenya

Bankers Association and Association of Microfinance Institutions (AMFI). This will

ascertain the extent to which there could be improvements in the conditions

affecting competition and consumer protection in the sector;

5.4. The sector study will also highlight the relevant aspects that the Authority and/or

relevant stakeholders may take into account, and provide alternatives to address

competition issues and some proposed remedies based on international best

practices, and;

5.5. Make recommendations to the Authority on any matter potentially needing

legislative or regulatory attention.

5.6. Present detailed recommendations aimed at increasing competition in the banking

sector.

6. The inquiry has been divided into two phases. The first phase will focus on providing a

preliminary assessment of competition and consumer protection concerns in Kenya’s

banking industry. It will identify potential areas of concerns that can be subject to an in-

depth analysis in Phase 2 of the competition market inquiry.

7. This report presents the findings of the first phase. As per the objectives, this report

presents a preliminary competitive assessment of the Kenyan banking industry, and

identifies if there are specific competition concerns that need to be further explored. This

report intends to inform the prevailing debate regarding the Kenyan banking industry with

relevant analysis and data.

8. The assessment of competition in the Kenyan banking industry is done using the standard

tools of competition analysis that have also been used by regulators in other countries

when conducting their own market inquiries. The report discusses the market structure of

the Kenyan industry based on key indicators such as the level of concentration, barriers to

entry and expansion and buyer power. It also explores the possibility of a link between

high interest rate spread/profits and high concentration. These results are evaluated using

internationally accepted benchmarks. This report is structured in the following way:

8.1. Section 2 provides an overview of the Kenyan banking industry

8.2. Section 3 presents a brief description of the typical approach for a competition

market inquiry

8.3. Section 4 describes the market segments and products that exist in the Kenyan

banking industry

8.4. Section 5 analyses the market structure of the banking industry

8.5. Section 6 discusses the interest spread in the industry

8.6. Section 7 assesses profitability of the Kenyan banking industry

8.7. Section 8 presents the conclusions and the tasks for Phase 2

8.8. Section 9 gives the policy recommendations based on the conclusions in this

report.

11


2. OVERVIEW OF THE KENYAN BANKING

INDUSTRY

9. The banking sector in Kenya currently comprises 43 licensed banks plus one mortgage

finance company, and nine licensed microfinance banks (MFBs).7 Of these 43 licensed

commercial banks, 29 are locally owned banks with the remainder being international

banks.8 Three of the locally owned banks have a significant shareholding by the

Government of Kenya. The banks in Kenya service a wide variety of consumers including

corporates, small or medium enterprises (SMEs) and individuals. Note that Charterhouse

Bank Ltd. is under statutory management. Consequently, we consider the Kenyan

banking industry to currently comprise 42 operational banks and one mortgage finance

company.

10. The Kenyan banking sector is one of the largest in East Africa.9 As of December 2013,

the total assets for Kenya’s commercial banks were around Kenyan Shilling (Ksh) 2.7

trillion while the total loans were Ksh 1.6 trillion. The total deposits were Ksh 1.9 trillion.

Table 1: Total assets, loans and deposits in Kenyan banking industry (in Ksh Million)

Kenya Banking Industry As of December 2013

Total Assets 2,703,394

Total Loans 1,564,635

Total Deposits 1,935,661

Source: CBK Annual report 2013. p. 28-29.

11. Kenya also has a large microfinance sector which caters to the financial needs of micro

businesses and individuals. In Kenya, microfinance institutions were historically

considered to be providers of credit to micro business and individuals and were not

allowed to take deposits. However, since May 2008 microfinance institutions can apply for

a license to become an MFB that is allowed to accept deposits. As a result these

microfinance institutions are now in a position to meet a broader set of needs of their

customers. This move was expected to increase competition in the banking industry,

particularly for the low-income customers. As of December 2013, the net advances of the

MFBs stood at Ksh 27.4 billion whereas total deposits were at Ksh 24.7 billion.10

12. There are currently over 50 micro-finance institutions and also a significantly large

network of over 2,200 Saving and Credit Co-operative Societies (SACCOs). These

institutions have played an important role in extending financial services to a larger set of

consumers. Further, Kenya has been successful in using information and communication

technology (ICT) to deliver financial services to the under banked and unbanked

consumers. There were 30.4 million pre-paid mobile money subscribers in Kenya as of

April 2013, and the total number of deposits amounted to KSH 226 billion.11

Most of this is

accounted for by a mobile payment service namely m-pesa.

7 Information from the Central Bank of Kenya.

8 CBK. 2013. Bank Supervision Annual Report 2013.

9 http://elibrary.worldbank.org/doi/pdf/10.1596/1813-9450-5442

10 CBK. 2013. Bank Supervision Annual Report 2013.

11 http://www.businessdailyafrica.com/MPesa-grows-to-biggest-bank-by-customer-deposits/-/539552/1752126/-

/15r12ao/-/index.html

12


2.1. GROWTH IN THE INDUSTRY

13. The banking sector of Kenya has continued its growth in assets, deposits, profitability and

product offering over the last few years. For example, the total loans as well as deposits

in the Kenyan banking industry have almost doubled in the last five years. As Figure 1

shows, the total loans were Ksh 0.9 trillion while deposits were Ksh 1.2 trillion in 2010.

Total loans have increased to Ksh 1.6 trillion while deposits have increased to Ksh 1.9

trillion in 2013.

Figure 1: Total loans and deposits in Kenyan banking industry from 2010-2013 (in Ksh Million)

Source: Annual reports, Central Bank of Kenya

14. This growth has largely been attributed to financial deepening in the industry, which is

supported by an industry wide branch network expansion strategy in Kenya as well as in

the East African region, and the automation of services. In particular, there has been an

expansion of banking services to small businesses and low-income individuals. This has

led to growth in deposits, which are the main source of funds for banks in Kenya.12

The

growth in deposits is driven by the growth of deposit accounts, bank branches and

agents.13

14.1. Deposit accounts. The number of deposit accounts in commercial banks increased

from 4.7 million in 2007 to 22.1 million as of October 2013.

14.2. Bank Branches. The total bank branches in Kenya increased from 740 in 2007 to

1,272 in 2012.

14.3. Agents. As of December 2013, the Central Bank of Kenya (CBK) had given

approval to 13 commercial banks to offer banking services through agents, thereby

allowing banks to use third parties to offer banking services. This helps the banks

reach more customers, particularly those located in remote and sparsely populated

12

As seen in Table 1, the customer deposits are a large proportion of total assets. 13

World Bank. 2013. Reinvigorating growth with a dynamic banking sector.

13


areas. As of October 2013, there were a total of 22,423 agents being employed by

the banks.

15. The growth in the Kenyan banking industry has been accompanied by increased

competition over the last few years as a result of entry by new players and greater

business and financial innovations.

16. Despite the growth, there is considerable scope for increasing penetration of banking

services in Kenya. As can be seen in the data from FinAccess survey, in 2013 only 32.7

per cent of adult population in Kenya accessed financial services from institutions,

including commercial banks and MFBs, that are prudentially regulated and supervised by

independent statutory regulatory agencies (CMA, CBK, IRA, RBA and SASRA).14,15

While

demand side factors such as low incomes and low financial literacy contribute to this

outcome, supply side factors are likely to be an important reason for the low use. These

factors could be: (i) high cost of credit, (ii) lack of access to bank branches, (iii) lack of

traditional collateral, such as land, (iv) stringent requirements for accounts, (v) high

transaction costs, and (vi) improper risk assessment and information asymmetries.16

However, despite these issues, Kenya has performed relatively well in terms of financial

access through other formal mechanisms such as mobile phone, post bank, and

microfinance institutions, etc. In 2013, 66.8 per cent of adult population in Kenya had

access to some type of financing through formal mechanisms, while others used either

informal mechanisms or were completely excluded.17

Kenyans may now have better

financial access than residents of most other African countries.18

2.2. REGULATORY ENVIRONMENT

17. The Central Bank of Kenya (CBK) is the regulator of the banking industry in Kenya. The

CBK is responsible for formulating and implementing monetary policy and fostering the

liquidity, solvency and proper functioning of the financial system. The commercial banks

have an industry association, Kenya Bankers Association (KBA), which works as a forum

to address issues affecting the banking sector. Similarly, the micro-finance institutions are

organized under the Association of Micro-Finance Institutions (AMFI) which addresses

concerns of micro-finance institutions.

18. The banking industry in Kenya is primarily governed by the Banking Act, the Central Bank

of Kenya Act and the various prudential guidelines issued by the CBK.19

In addition, the

Microfinance Act, The National Payment System Act and the Kenya Deposit Insurance

Act also regulate the activities of the industry players. The commercial banks are

regulated primarily through the Prudential Guidelines set, and periodically updated, by the

CBK. These typically cover bank license requirements, capital requirements, liquidity

measures and requirements, foreign exchange limits, and prohibited business. The most

recent regulations issued by the CBK are the Prudential Guidelines of 2013 which are

intended to make the banking system of Kenya more sustainable and transparent.

14

The respective full forms are: CMA – Capital Markets Authority; CBK – Central Bank of Kenya; IRA – Insurance Regulatory Authority; RBA – Retirement Benefits Authority; SASRA – Sacco Societies Regulatory Authority. 15

FSD Kenya and Central Bank of Kenya. FinAccess National Survey 2013. October 2013. 16

http://www.imf.org/external/np/seminars/eng/2013/kenya/pdf/nju2.pdf 17

FSD Kenya and Central Bank of Kenya. FinAccess National Survey 2013. October 2013. 18

https://www.standardmedia.co.ke/business/article/2000107091/kenya-leads-african-peers-in-financial-access-report 19

The Companies Act is also applicable to the banks for the purpose of registration of banks as a business.

http://www.imf.org/external/np/seminars/eng/2013/kenya/pdf/nju2.pdf

https://www.standardmedia.co.ke/business/article/2000107091/kenya-leads-african-peers-in-financial-access-report

14


19. The micro-finance banks, on the other hand are regulated through various microfinance

regulations. The Microfinance Act of 2006, that became operational in May 2008,

effectively allowed microfinance institutions to apply for a license for becoming an MFB

that is allowed to accept deposits. The Microfinance Act enables the MFBs to “mobilise

savings from the general public, thus promoting competition, efficiency and access”.20

It is

ultimately expected that the microfinance industry will play a crucial role in deepening

financial markets and enhancing access to financial services in Kenya.

20. The key difference in the requirements for MFBs and commercial banks is in the capital

requirement. Microfinance banks are only required to hold KSH 20m or 60m, for

community-based or nationwide banks respectively, while commercial banks are required

to hold KSH 1bn. However, the core of their business must remain ‘micro-focused’

because they are only allowed to lend up to 30 per cent of core capital to large exposures

(those that exceed 2 per cent of core capital and not more than 5 per cent of core capital).

This limits the ability of microfinance providers to compete effectively for loans and

advances in the high salary and corporate segments. Note that there is no regulatory

restriction on who the MFBs can lend to.

21. The details for the various banking regulations are presented in Appendix A. A few recent

changes in Kenya’s banking regulatory landscape to be noted are:

21.1. The introduction of deposit insurance regulations. Deposit insurance is part the

financial system safety net. In Kenya, the Kenya Deposit Insurance Corporation

(KDIC) provides for a deposit insurance scheme for customers of member

institutions, and includes: administering the deposit insurance scheme; collecting

contributions for the Fund from member institutions; and holding, managing, and

applying the Fund. The Kenyan deposit insurance regulation covers (i) current

accounts, (ii) saving accounts, (iii) call deposits, (iv) fixed/term deposits and (v)

foreign currency deposits. Since deposit insurance regulations promote deposit

protection, instill public confidence, and foster financial stability, they allow for

smaller banks to compete more effectively with large banks.

21.2. The CBK launched a credit information sharing mechanism between banks in 2010

to ensure that banks get access to credit histories of potential borrowers from other

banks.21

This has led to more efficient evaluation by banks of credit-worthiness of

its customers and thus allows them to charge an interest rate that is more aligned

with the possible risk in lending to a given customer. While previously, the

mechanism allowed for sharing only the negative history (i.e., where a customer

may have defaulted on loans), now the CBK has allowed for sharing of positive

history also. This is likely to result in better pricing for customers that have a good

credit history and may lead to lower average interest rates. Only two bureaus have

been licensed to date including, Credit Reference Bureau Africa Limited and

Metropol Credit Reference Bureau Limited.

21.3. The minimum capital requirements in terms of the core capital was increased in the

2008 Prudential Guideline, with effect from 31 December 2012, from the previous

Prudential Guidelines issued in 2000 and 2006, where capital requirements did not

20

Central Bank of Kenya website https://www.centralbank.go.ke/index.php/microfinance-institutions 21

DEVELOPMENTS IN THE KENYAN BANKING SECTOR FOR THE QUARTER ENDED 30th JUNE 2013. CBK.

15


have a conservation buffer. The minimum core capital was set at 250m Ksh and is

now 1b Ksh.

21.4. Through the recent changes in the Prudential Guidelines, the CBK has requested

banks to publish their total cost of credit, including interest as well as non-interest

costs. This may increase price transparency and thus competition among banks

going forward. Further, the Central Bank has also issued Guidelines on Consumer

Protection effective from 201222

with the aim of promoting fair practices and

transparency, fostering confidence in the banking sector, and providing efficient

mechanisms for dealing with consumer grievances.

22

Central Bank of Kenya. Prudential Guidelines for Institutions Licensed under the Banking Act: CBK/PG/22 Consumer Protection.

16


3. APPROACH FOLLOWED FOR THE MARKET

INQUIRY

22. This report applies the standard framework used in market inquiries to assess competition

in the Kenyan banking industry. The key element of the framework is an analysis of the

market structure since that determines the incentives for banks to compete. An

uncompetitive market structure raises the possibility of market power with one or more

firms in the market i.e. the possibility that one or more firms in the market have the ability

to raise prices above competitive level.

23. While an analysis of the overall competitiveness of an industry is the correct starting point

for a competition market inquiry, it is also important to examine the market structure in

different segments. The banking industry in Kenya consists of several segments in terms

of customers which ought to be analysed separately. Further, market structure must also

be analysed for the different types of products being offered by Kenyan banks.

24. Having determined the various levels at which the market assessment is to be carried out,

one then examines three key features of the market to determine its competitiveness:23

24.1. Level of concentration. Concentration in a market refers to the distribution of

market share among the firms that are part of the market. If one or a few firms have

a large part of the market, the market is said to be concentrated. These firms can

then act independently of the other firms and thus have the market power to raise

prices above competitive levels. In contrast, in an unconcentrated market where

the market is divided up more evenly among several smaller firms, the pricing

decisions of a firm are constrained by the behaviour of other firms.

24.2. Entry barriers and expansion. Entry barriers are the constraints on firms in entering

a market. A market with no entry barriers can be competitive even with high

concentration. The threat of new entry constraints the behaviour of existing firms. If

the existing firms charge a high price, then the prospect of high profits will attract

new firms into the market leading to a fall in industry wide prices. Note that for new

firms to compete with the incumbents there should also be no barriers to

expansion.

24.3. Countervailing buyer power. Countervailing buyer power refers to the power that

buyers, individually or as a group, may have to determine market outcomes. Even

in a situation of high concentration and entry barriers, the market structure may be

competitive if the buyer has the market power to match the market power of the

seller. Buyer power is exercised by the consumer by not purchasing the product if

the price is high. The seller is then forced to bring down prices even if he is the only

player in the market.

25. This analysis involves examining data as well as understanding the institutional details of

the market to determine if there are competition concerns in a market. A market inquiry

may then further probe market outcomes such as price, quantity and quality of the product

with a view of relating them to the observed market structure i.e. the level of competition.

In the banking industry this implies understanding how deposit rates, lending rates and

23

Bishop and Walker. 2010. The Economics of EC Competition Law. Third Edition. Sweet and Maxwell. p. 62.

17


various banking service fees are set, and determining if there is a link between these

rates and fees and the market structure. For example, if the market is found to be

uncompetitive do we also observe high interest spreads or fees?

26. Finally, profitability of the players in the industry is analysed. It is important to understand

the source of high profit margins, if any. For example, high profit margins in the banking

industry can come from high interest spread or high non-interest income or low costs. In

addition, the profitability measures have to be benchmarked to come to a conclusion

about their appropriateness.

27. We follow the above framework for assessing the market structure in the Kenyan banking

industry. The data used for the analysis largely comes from the regulatory returns

submitted by commercial banks and MFBs to the CBK every month. The following data

has been used in our analysis:

27.1. BSM form. This form contains information about various assets and liabilities of the

bank as of the end of a month, along with their breakup into various categories as

specified by the CBK. From this form, our analysis uses the balance sheet data

(Table A), breakup of loans by sector (Table C11-V), mortgage loans (Table D) and

breakup of total loans and deposits by market segments, and different tenors

(Table F(New)). The banks are required to submit the BSM returns every month.

27.2. CBK/PR2188001. This form has the profit and loss statement of the bank, and

includes data on various income and cost elements.

27.3. CBK/PR26B9001. This form provides the geographical distribution of the branches

of a bank. It also contains the deposits, loans and non-performing at each branch.

27.4. MFB Balance sheets. The balance sheet of the MFBs contains the information

about assets and liabilities of the MFBs. This includes information on total loans.

28. A limitation of our data set is that out of the 43 commercial banks, we have data for 33

banks. While CBK requested all 43 banks to share the above data for this market inquiry,

only 33 banks gave consent to the CBK’s request. These constitute 82.5 per cent of total

deposits by commercial banks and 72.4 percent of loans and advances.24

Given these

large percentages, we believe that our conclusions are unlikely to be distorted due to lack

of data. We have noted where incomplete data may affect the results and have used data

from other sources or appropriate assumptions to draw conclusions about the market

structure.

29. Besides the data provided to us by the CBK, we also make use of other publically

available data. The analysis done in this report pertains to 2013 except if data for 2013

was not available. To check for robustness of the results, the same calculations and

analyses are done for 2012 and are presented in the Appendix. If the conclusions are

different from the conclusions arrived at using 2013 data, these are noted.

30. We start by discussing the various market segments and products in the banking industry.

24

Based on total deposits and net loans and advances in the banking industry as of December 31, 2013, as per the CBK.

18


4. MARKET SEGMENTS AND PRODUCTS

31. A bank serves several types of end consumers, ranging from large corporates to low-

income individuals. Further, a bank typically offers several distinct products that differ by

collateral requirement, time period, etc., to each consumer group. Examples of such

products are mortgage loans, vehicle financing and unsecured loans on the lending side

and current accounts, saving accounts, etc. on the deposits side. Thus, the banking

industry is divided into several market segments based on the different consumer groups

being served, and further into several products within each market segment.

4.1. MARKET SEGMENTS

32. It is widely acknowledged that corporate banking and retail banking are distinct market

segments in the banking industry. Corporate banking refers to banking services provided

to large corporates. On the other hand, retail banking is defined as providing banking

services to small or medium enterprises (SMEs) and individuals. As the definition

suggests, retail banking can be further divided into SME banking and personal banking.

33. The logic for making the distinction between market segments is that consumers in each

segment have different needs. As corporate segment customers require tailor-made and

sophisticated solutions for their financial needs, it is considered distinct from the retail

segment. Further, the retail segment is further divided into SME and personal as

customers in one segment are different from customers in the other in terms of their

characteristics as well as their banking needs. This approach follows the precedent set in

market inquiries conducted in other countries. For example, several inquiries initiated in

the United Kingdom (UK) relate only to the SME segment or the personal segment.25

34. In Kenya too, banks distinguish customers on the basis of whether they belong to the

corporate, SME or personal segment. Business activities of several Kenyan banks are

structured along these lines. Figure 2 below shows the distribution of lending and deposits

in Kenya across corporate, SME and personal segments as of December 2013. Data has

been obtained for 33 banks from Table F(New) of their BSM returns. We see that the

corporate segment accounted for 47 per cent of total lending, while SMEs accounted for

20 per cent and personal banking accounted for the remaining 32 per cent. Further, 43

per cent of deposits come from the corporate segment, while 24 per cent and 33 per cent

come from the SME segment and personal segment respectively. Thus, corporate

segment’s share in lending is greater than its share in deposits. This suggests that

lending in corporate segment is made using deposits from SME and personal segment,

whose share in lending is lower than share in deposits.

25

For example, the UK Competition Commission (CC) investigation of the SME banking in 2002, CC investigation of personal current account banking in Northern Ireland in 2007, the Office of Fair Trading (OFT) review of 2007 of the SME undertakings arising from the CC’s SME report in 2002 and the OFT market study of PCAs in the UK in 2008.

19


Figure 2: Share of corporate, SME and personal segments in the Kenyan banking industry

Source: CBK; Genesis calculations

35. Note that, in addition to the above market segments, banks also lend to each other

through inter-bank transactions. However we do not consider inter-bank transactions in

this report as our focus is to determine the level of competitiveness of the banking

industry in products and segments which are of interest to end consumers.26

4.2. PRODUCTS

36. As discussed earlier, market segments can be further divided on the basis of the different

lending and deposit products offered in each segment.27

While a consumer can purchase

all products from the same bank, consumers often consider different banks for different

products. Banks therefore compete at the level of lending and deposit products within a

particular market segment. For this reason, it is important to distinguish between different

products within a particular market segment in order to assess the level of

competitiveness in the Kenyan banking industry.

37. Broadly, we consider four products corresponding to each market segment, two each on

the lending and deposits side.

37.1. On the lending side we consider secured loans, i.e., loans that are backed by

assets such as mortgages or vehicle financing, and unsecured loans, i.e. loans that

are not backed by any asset, such as overdrafts, credit card loans or term loans.

26

As of December 2013, lending market shares inclusive of Inter-bank transactions were: 41 per cent for corporates, 18 per cent for SMEs, 28 per cent for personal and 13 per cent for Inter-bank lending. Deposit market share inclusive of Inter-bank transactions were: 40 per cent for corporates, 22 per cent for SMEs, 31 per cent for personal and 8 per cent for Inter-bank deposits. Inter-bank lending as a proportion of total lending varies from 0 per cent to 60 per cent. 27

Banks usually also offer other products than those related to lending and savings, such as insurance, wealth management advice, etc. These are often not seen as the main banking services and we do not consider them in this report. This approach is in line with market inquiries in other jurisdiction such as the OFT’s report on entry barriers in the UK retail banking in 2010.

20


37.2. On the deposits side, we consider demand deposits, used primarily to make or

receive payments, and saving deposits and other term deposits that give

consumers a return on the deposit.

38. The above approach follows the Office of Fair Trading (OFT) market inquiry on entry

barriers in retail banking.28

Table 2 provides a description of different products in the

personal and SME segments as per the OFT. As the market inquiry by the OFT was

specifically for retail banking, the table does not list products in the corporate segment.

However, corporate customers would be offered products similar to those offered to the

SME segment, the difference being that the loans and deposits would be much larger in

the corporate segment.

Table 2: Products offered by banks to various market segments and their description

Product Description by the OFT

Personal Banking

(i) Personal Current Account (PCA)

A PCA can be defined as an account for individual consumers, which provides the facility to hold deposits, receive and make payments using cheques, debit cards, Direct Debits and Standing Orders, to use ATMs and to make regular payments. Additionally, PCAs often have overdraft facilities.

(ii) Saving accounts and investment products

Saving accounts differ by whether or not they offer instant access, how often interest is paid, whether there are temporary bonus rates, withdrawal conditions and so on. Firms can also offer fixed rate saving bonds for a fixed term but with no access to the cash during the fixed period.

(iii) Mortgages and secured loans

A secured loan is a form of loan that is backed by an asset belonging to the borrower. The assets will be forfeited to the lender in the event of the borrower defaulting on loan repayments. The most common form of secured lending in the UK is a residential mortgage where the loan is secured on a home. Other forms of secured lending include car loans.

(iv) Credit cards and other forms of unsecured loans

Unsecured lending refers to loans that are made in the absence of collateral. If the borrower defaults, the lender does not have an asset as a security to fall back upon. Lenders generally provide unsecured loans for relatively small expenses such as purchase of computers, holiday expenses or an unexpected expense such as a medical bill. The most common form of unsecured lending is through credit cards.

SME Banking (and Corporate banking)

29

(i) Business Current accounts

Business Current Accounts (BCAs) are the equivalent of PCAs for business customers. As with PCAs, the main function is to make and receive payments (what are termed 'money transmission services'). Many BCAs also have overdraft facilities that can provide SMEs with short-term liquidity with funds being repayable on demand. Other features that can be offered with BCAs include debit cards and business advice.

(ii) Saving/deposit accounts

SMEs can use a number of different deposit products. These will differ by minimum and maximum amounts allowed to be deposited and limits on the amount and method of withdrawal. These accounts are not designed to handle day to day transactions but are like saving vehicles and are normally free of service charges.

(iii) Term loans and unsecured lending

Term loans are a form of unsecured lending to SMEs. Unlike overdrafts, term loans are not repayable on demand but instead have an agreed

28

OFT inquiry into barriers to entry, expansion and exit in retail banking. 2010. 29

The OFT report only considered products for the retail banking. The products listed for SME banking by the OFT would also apply to other business segment, namely the corporate banking.

21


Product Description by the OFT

upon repayment schedule. A term loan is capable of being drawn down, repaid and redrawn at the SME's discretion. Term loans are therefore more flexible, in some respects, than overdrafts and are granted over a fixed term with a rate of interest (either a fixed or variable rate) agreed upon with the SME.

(iv) Secured lending

SMEs can obtain secured lending from providers. SMEs can use these lending sources as alternatives to overdrafts to assist with cashflow. There are a number of types of secured lending available:

Commercial mortgages: This is a mortgage provided to SMEs to

purchase property for commercial purposes.

Asset financing: This is form of funding that allows SMEs to obtain funding

for the purchase of assets needed to run and grow their business. Asset

finance can include finance leases, operating leases and hire purchase,

where the SME leases the capital asset and ownership remains with the

leasing company.

Factoring: These are services used by SMEs to improve cash flow.

Factoring involves the factoring provider purchasing the sales invoices of

the SME, at a discount, as they arise in the normal course of trading. In

return the factoring provider processes the invoices, administers the

SME's sales ledger and allows the SME to draw funds on the amount

owed to it.

Invoice discounting: This is an alternative way of drawing money against

invoices for SMEs. The bank provides financing to the SME by purchasing

its sales invoices but the SME maintains its sales ledger and collects the

money from its debtors on behalf of the bank to whom the debts have

been assigned.

Source: OFT inquiry into barriers to entry, expansion and exit in retail banking. 2010.

39. We show the share of various products in the banking industry. Figure 3 shows the

breakup of total loans by overdrafts and term loans for the 33 banks. As described above,

overdraft loans are used to provide short-term liquidity to businesses through their

business current accounts. These form 17.6 per cent of total loans. The term loans

category captures all other type of secured and unsecured loans described above. These

have a specific time period in which they are to be repaid to the bank. These form 82.4

per cent of total loans.

22


Figure 3: Share of overdrafts and term loans in the Kenya banking industry


40. Similar analysis for deposit products is shown in Figure 4. We show the share of demand,

saving and term deposits. The demand deposits include current account and 7-day call

deposits and form 43.6 per cent of total deposits. The saving deposits are the deposits

made to saving accounts and form 14 per cent of total deposits. The remaining 42.4 per

cent are term deposits.

Figure 4: Share of overdrafts and term loans in the Kenya banking industry


41. Thus the following segments will be considered for assessing the market structure in the

Kenyan banking industry:

41.1. Corporate banking

41.2. SME banking

23


41.3. Personal banking

42. Further, the following distinct products can be considered within each of these market

segments:30

42.1. Demand deposits

42.2. Saving deposits and other interest bearing deposit instruments

42.3. Secured lending

42.4. Unsecured lending

30

Note that given the data constraints, we do not analyse all the product markets listed.

24


5. ANALYSIS OF MARKET STRUCTURE

43. This section presents our analysis of the market structure in the Kenyan banking industry.

We follow the approach described above to assess the extent and nature of competition

in the Kenyan banking industry.

5.1. MARKET CONCENTRATION

44. Competition between banks depends on the number and quality of options that a

consumer has when considering a banking product or service. In general, one would

expect a greater degree of competition in a market where there are several banks, each

having a low market share (i.e., a market with a low level of concentration), than in a

market which is concentrated in the hands of a few players. Thus, an important part of this

inquiry involves the assessment of the level of concentration in the different banking

segments and products described above.

45. A widely used measure of the level of concentration in a market is the Herfindahl-

Hirschman Index (HHI). The HHI is calculated as the sum of the squares of the individual

market shares of all firms in a market. For example, in a market which consists of a single

firm, the HHI would be 10,00031

while in a market containing a large number of very small

firms the HHI would be close to zero. Thus the HHI measure varies from 0 to 10,000, with

a higher HHI index reflecting a more concentrated market. The HHI has also been used in

other market inquiries to measure concentration.32

46. The US Department of Justice (DOJ) and the Federal Trade Commission (FTC) generally

classify markets into three types based on their HHI:33

46.1. Unconcentrated markets. HHI below 1500

46.2. Moderately concentrated markets. HHI between 1500 and 2500

46.3. Highly concentrated markets. HHI above 2500

47. In this market inquiry we follow the guidelines as set out by the DOJ and FTC in drawing

conclusions regarding the level of concentration in a particular market/product segment.

48. Our concentration analysis is primarily based on the loans and deposits data provided in

the BSM returns. While the total loans and deposits are available in three tables of the

form, we use Table F(New) that reports detailed data disaggregated by segments and

tenor of loan or deposit.34

Our conclusions rely on the data submitted by the banks to

CBK, which has been cross-checked, corrected and filled in using the best information

that is publicly available.

31

Square of the market share of the monopoly firm (100 per cent). 32

For example, the UK CC market inquiry into the SME sector calculates HHI for several relevant markets, Liquidity management, General purpose business loans, Other lending and Other deposits for England & Wales, Scotland and Northern Ireland. It finds the HHI for Liquidity management to be above 2000, and considers these values to be indicative of relatively concentrated markets. 33

Available at http://www.justice.gov/atr/public/guidelines/hmg-2010.html. Accessed on 21 June 2014. 34

Table A reports aggregate loans and deposits as part of the bank’s balance sheet. In addition, detailed data on loans and deposits by segments is presented in Table F of the BSM form. We use disaggregated data from Table F in cases where the data is unavailable in Table F(New).

http://www.justice.gov/atr/public/guidelines/hmg-2010.html

25


49. For the purpose of this market inquiry, we consider the 42 operational commercial banks

and the housing finance company that are licensed by the CBK to be the Kenyan banking

industry. The 33 banks listed in Table 3 gave consent to the CBK to share their lending

and deposit data, total and by market segment and product, for the purpose of this market

inquiry.

Table 3: Banks that gave consent

S. No. Bank

1 Bank of Africa (K) Ltd

2 Bank of Baroda (K) Ltd

3 Barclays Bank of Kenya Ltd

4 Citibank N.A. Kenya

5 Consolidated Bank of Kenya Ltd

6 Credit Bank Ltd

7 Development Bank of Kenya Ltd

8 Diamond Trust Bank (K) Ltd

9 Dubai Bank Ltd

10 Ecobank Kenya Ltd

11 Equity Bank Ltd

12 Family Bank Ltd

13 Fidelity Commercial Bank Ltd

14 Giro Commercial Bank Ltd

15 Guaranty Trust Bank Ltd

16 Guardian Bank Ltd

17 Gulf African Bank Ltd

18 Habib Bank A.G. Zurich

19 Habib Bank Ltd

20 Housing Finance Co. of Kenya Ltd

21 I&M Bank Ltd

22 Imperial Bank Ltd

23 Jamii Bora Bank Ltd

24 Kenya Commercial Bank Ltd

25 K-Rep Bank Ltd

26 Middle East Bank (K) Ltd

27 National Bank of Kenya Ltd

26


S. No. Bank

28 NIC Bank Ltd

29 Oriental Commercial Bank Ltd

30 CFC Stanbic Bank (K) Ltd

31 Standard Chartered Bank (K) Ltd

32 Trans - National Bank Ltd

33 Victoria Commercial Bank Ltd

50. For 8 remaining banks, in Table 4, total deposits and loans have been obtained from their

annual reports.35

Table 4: Banks for which total deposits and loans were obtained from publically available sources

S. No. Bank

1 African Banking Corporation Ltd

2 Bank of India

3 Chase Bank Ltd

4 Commercial Bank of Africa Ltd

5 Co-operative Bank of Kenya Ltd

6 Equatorial Commercial Bank Ltd

7 First Community Bank Ltd

8 Prime Bank Ltd

51. No data is publicly available for Paramount Universal Bank Ltd and UBA Kenya.

52. The market share of each bank (except Paramount and UBA) in the Kenyan banking

industry for 2013 is presented in Appendix B. Figure 5 below graphically depicts these

market shares in lending and deposits, excluding inter-bank transactions. The market

shares are calculated using total lending and deposits from Table F(New) of the BSM

returns for the 33 banks listed earlier36

and from the financial statements of 8 banks.

35

The data in annual reports is as of December 2013 except for Bank of India which is as of September 2013 and Chase Bank which is as of December 2012. 36

However since some relevant information had not been filled in Table (F) new for Dubai Bank, Imperial Bank and Consolidated Bank, the total lending and deposits for Dubai Bank, total lending for Consolidated Bank, and total deposits for Imperial Bank as of December 2013 were taken from Table F of the BSM returns for these banks.

27


Figure 5: Market share in total lending and deposits

Source: CBK; Bank financial statements; Genesis calculations

Note: Data for Bank of India is as of September 2013 and for Chase Bank which is as of December 2012.

53. As can be seen from Figure 5, KCB had the highest share in deposits as well as in

lending (13 per cent in both) as of December 2013. No one bank is dominant in either the

lending or the deposit side of the market. Based on the market shares in deposit and

28


lending, the respective HHIs are 607 and 643 respectively, implying that both overall

deposits and overall lending would be classified as unconcentrated per the US guidelines.

54. Commercial banks may also face competition from microfinance institutions, particularly in

the retail segment. While all microfinance institutions can offer loans, the CBK has given

licences to nine MFBs to accept deposits. These banks may exercise a competitive

constraint on commercial banks.

55. Figure 6 shows the market share of MFBs based on the total loans given by them as of

December 2013. It shows that the MFB sector is dominated by KWFT and Faulu.

Figure 6: Market share of MFBs based on total loans issued by them


56. We compare the loans and advances given by MFBs to the total loans and advances

made by commercial banks. For this purpose, we do not include the loans given by

commercial banks to the corporate segment as they are not comparable to the MFB loans

in terms of customers or size of loan. Table 5 below shows total loans made by MFBs and

loans of commercial banks in the retail segment as of December 2013.

Table 5: Comparison of loans by MFBs and by the commercial banks

Loans Amount (KSH ‘000)

MFBs 28,148,138

Commercial banks – SME segment 256,732,667

Commercial banks – Personal segment 408,900,632


57. The value of MFB lending is only 4.2 per cent that of the loans given by commercial

banks. Thus, the size of the MFB sector is relatively small compared to the commercial

banking sector. As a result, while MFBs may exercise a competitive constraint on some of

the smaller banks (the total loans advanced by these MFBs as of December 2013 was

greater than the total SME and personal loans advanced by the smallest 14 banks for

29


which we have data)37

, they are not a competitive constraint on the industry as a whole.

Thus we will not include them in this analysis and this exclusion will not distort the

competitive assessment we seek to undertake.

58. While we see that at an overall level lending and deposits are unconcentrated, analysing

concentration at an overall level can be misleading. This is because banks compete at the

level of specific market segments and products, and overall levels of concentration are

not informative about the level of competition in particular segments. Thus, to get a true

picture of the state of competition in the Kenyan banking industry it is important to analyse

the level of concentration in different consumer segments and product categories. We

present the results of this analysis next.

5.1.1. Concentration in different market segments and products

59. In section 4 we described the various market segments and products in the banking

industry. We now look at the level of concentration in the various market segments as well

as in the different lending and deposit products within those segments. We will analyse

concentration in each market segment (i.e., corporate, SME, and personal) and each

product within the market segment. Note that based on the data, the products we can

consider are overdrafts and term loans38

on the lending side and demand deposits, saving

deposits and term deposits on the deposit side. The underlying data for these analyses is

presented in Appendix B. We are unable to consider secured and unsecured lending as

product categories because of data constraints.

60. The following analysis presents results on concentration for each product within each

market segment. Product-wise data has been obtained from Table F(New) of the BSM

returns for the 33 banks which consented to share data. Note that data on deposits by

segment is not available for Imperial Bank and Dubai Bank since the relevant fields in

Table F(New) of their BSM returns were empty. Additionally, deposit data for banks is not

separated by segment even in Table F of the BSM returns.39

61. We also consider data for three additional banks, namely CBA, Co-operative Bank and

Chase Bank, in the concentration analysis since product-wise lending and deposit data

was publically available for these banks. Including these banks would give us a more

accurate picture of the industry. For these three banks we have assumed that their market

share for each product market within a segment is the same as their share in the overall

product market. Thus our concentration analysis is based on data for 36 banks. While the

segment wise analysis does not include the other 5 banks for which total deposits and

loans are available, our conclusions regarding concentration will not be affected since

these banks are small banks.40

62. The analysis considers foreign and local currency transactions together, but excludes

inter-bank transactions, while calculating concentration. Note that the analysis relies on

each bank’s classification of its loans and deposits into one of three market segments,

37

Loans advanced by those 14 banks as of December 2013 amounted to KSH 25 billion. 38

Aggregation of loans of different tenors. Excludes overdrafts and inter-bank lending. Includes both secured and unsecured types lending. 39

Data for lending obtained from Table F for Dubai Bank and Consolidated Bank is, however, divided into segments and has been used in our analysis. 40

Theoretically, in markets such as SME overdrafts and personal overdrafts, due to the small size of these markets the concentration level can increase upon including the remaining small banks if these small banks if these segments account for a large proportion of the activity of those banks. However, in practice, this is unlikely.

30


i.e., corporate, SME, and personal. However the criteria for classifying customers into

each market segment varies from bank to bank.41

Despite this, we believe that the

analysis would still be useful to provide evidence on the level of concentration in each

market segment.

63. We also analyse concentration in credit card lending, consumer durable loans and

mortgages. For the 33 banks which have provided data information on these products is

available from their respective BSM returns. For analysing concentration in credit card

lending, we take into account publicly available information on the value of such loans for

CBA and Co-operative Bank. We also present concentration measures for residential

mortgages for all 43 banks using data from the CBK’s Bank Supervision Annual Report

2013 to supplement our analysis of concentration in mortgage lending for 33 banks.

64. The following sections present our analysis of the level of concentration in various

segments and product categories of the Kenyan banking industry.

5.1.1.1. Corporate banking

65. The corporate banking segment in Kenya deals with large business entities, and

customers in this segment are serviced primarily by bank branches in Nairobi and

Mombasa. In terms of both lending and deposits, the corporate segment is the largest

segment in the Kenyan banking industry.42

This segment accounted for 47 per cent of all

lending and 42 per cent of all deposits as of December 2013.43

Consequently, a

competitive corporate segment is vital to ensure a competitive banking industry.

66. Figure 7 and Figure 8 below show the market shares of different banks based on value of

corporate lending and corporate deposits respectively as of December 2013.44

41

The division between corporate and SME banking is often made by banks in terms of turnover of the business entity such that all entities larger than the turnover threshold are considered as corporates while those below the turnover threshold are considered as SME. Other metrics such as loan size, number of employees, etc. may also be used by banks. The criteria differ between banks such that a large bank may consider a business entity, SME, while a small bank may consider the same entity corporate. The extent of such discrepancies is likely to be less for similarly sized banks. There may also be some issues of classification between SME and personal for microfinance sector. A loan given to microfinance customer may be used for the person’s business or for personal use. 42

Note that, as in the earlier section, we do not consider Inter-bank transactions when calculating the share of market segments. 43

Calculated for 33 banks for which we have received the BSM returns. The deposit calculations, however, excludes Dubai Bank and Imperial Bank since their deposits by market segment are not available. 44

As noted, the analysis of corporate concentration is based on banks submission of to the CBK, where varying definitions of corporate segments may have been used by the banks.

31


Figure 7: Market share in corporate lending


Note: The share of individual banks within ‘Other banks’ is not greater than 3 per cent

Figure 8: Market share in corporate deposits



67. As can be seen from the two figures, the corporate segment on the whole has several

players for both lending and deposits. The HHI for corporate lending is calculated to be

709, which indicates an unconcentrated market. Similarly corporate deposits are

unconcentrated with an HHI of 1149. We next look at the level of concentration in the

markets for specific products within the corporate segment.

32


Concentration in corporate lending products

68. Available data enables us to calculate market share of products within corporate lending -

(i) overdrafts (ii) term loans.

69. Overdrafts form 30 per cent of corporate lending45

, and are an important source from

which corporates get their working capital. The market share of the different banks within

corporate overdrafts is presented in Figure 9 below.

Figure 9: Market share in corporate overdraft lending



70. The HHI of the corporate overdraft lending is 767, implying that the market for overdraft

lending is unconcentrated. This can also be observed from Figure 9 which suggests that

the corporate overdraft lending is provided by a number of banks and no one bank seems

to dominate.

45

Calculated for 33 banks for which we have received the BSM returns.

33


Figure 10: Market share in corporate term loans


Note: The share of individual banks within ‘Other 21 banks’ is not greater than 2 per cent

71. Figure 10 above depicts the share of different banks in the market for corporate term

loans. In the corporate segment, term loans make up 70 per cent of corporate lending.46

With an HHI of 797 the market for such loans is unconcentrated.

Concentration in corporate deposit products

72. We similarly assess the level of concentration in the markets for different types of deposit

products in the corporate segment (i) demand deposits, (ii) saving deposits, (iii) term

deposits47

as of December 2013.

Figure 11: Market share in corporate demand deposits

46

Calculated for the 33 banks for which we received the BSM returns. 47

Aggregate for deposits of different tenors. Excludes demand, saving deposits and inter-bank.

34




73. Demand deposits make up 54 per cent of corporate deposits.48

With an HHI of 1508 the

HHI for this product falls in the moderately concentrated category but since the number is

just above the cut-off and will likely show as unconcentrated on including the missing

banks, we consider it an unconcentrated market. The top four banks in this product

category have 68 per cent market share. 49

Figure 12: Market share in corporate saving deposits



74. Figure 12 displays the share of different banks in corporate saving deposits. This market

is moderately concentrated, with an HHI of 2492. The three largest banks have a

cumulative market share of 84 per cent. These deposits comprise 3 per cent of corporate

deposits.50

48


In 2012, the HHI for corporate demand deposits is 1711 and the market share of top four banks is 68.3 per cent. See Appendix C. 50

Calculated for the 33 banks for which we received the BSM returns.

35


Figure 13: Market share in corporate term deposits



75. Figure 13 shows the market shares of various banks in corporate term deposits. An HHI

of 907 makes this market unconcentrated. These deposits constitute 43 per cent of

corporate deposits.51

76. Note that KCB’s high share in corporate deposits is a result of the fact that it classifies

government deposits as corporate deposits. These in turn account for a large share in

KCB’s corporate deposits.

5.1.1.2. SME banking

77. The SME banking segment includes banking transactions with non-corporate businesses.

These can range from relatively large entities, which are similar to those considered in the

corporate segment, to fairly small businesses, which may be closer to the clientele of the

microfinance sector. The SME segment comprised of 20 per cent of total lending and 24

per cent of total deposits in the Kenyan banking industry as of December 2013.52

78. Figure 14 and Figure 15 below depict the market shares of banks in SME lending and

deposits respectively as of December 2013.53

51



As also discussed above, the analysis of SME concentration is based on banks submission of to the CBK, where varying definitions of SME segment may have been used by the banks.

36


Figure 14: Market share in SME lending



Figure 15: Market share in SME deposits



79. The figures show that on an overall basis both lending and deposit markets in the SME

segment are fragmented. As of December 2013, the market share of the top four banks

was 57 per cent in lending and 48 per cent in deposits. The HHI based on the above

market shares is 1006 and 849 for SME lending and deposits respectively, and thus both

can be characterised as unconcentrated. We next consider the concentration in different

lending and deposit products in the SME segment.

37


Concentration in SME lending products

80. The products considered for the SME segment are the same ones considered for the

corporate segment. We consider the level of concentration in overdraft lending first.

Figure 16: Market share in SME overdraft lending



81. The share of the different banks in SME overdraft lending is depicted in Figure 16.

Overdraft lending comprises 23 per cent of total SME lending.54

With an HHI of 1004 this

market is unconcentrated.

Figure 17: Market share in SME term loans


54

Calculated for the 33 banks from which we have received the BSM returns.

38



82. Share of different banks in SME term loans is depicted in Figure 17. Such lending

comprises 77 per cent of SME lending, and with an HHI of 1164 can be characterised as

unconcentrated. The top four banks have a combined market share of 59 per cent.55

Concentration in SME deposit products

83. A similar exercise has been done for deposit products within the SME banking segment.

The products considered are the same as those considered for the corporate segment.

We first consider concentration levels in demand deposits and saving deposits.

Figure 18: Market share in SME demand deposits



55

Note that in 2012, the HHI in the SME term loan market is estimated to be 1537 and the market share of top four banks is 46.3 per cent. See Appendix C.

39


Figure 19: Market share in SME saving deposit



84. Demand deposits make up 48 per cent of SME deposits.56

Figure 18 above depicts the

share of banks in SME demand deposits. We note that while Barclays has more than 20

per cent of the market, banks such as KCB and Equity Bank also have close to 15 per

cent of the market. Further, there are a number of other banks that accept demand

deposits. With an HHI of 1298, this market can be considered unconcentrated. The top

four banks in this category have a market share of 66 per cent.

85. Figure 19 shows the share of different banks in SME saving deposits. Saving deposits

account for only 10 per cent of SME deposits.57

As can be observed, more than half such

deposits are with Barclays, and as a result the HHI of this segment is 3125, making it

highly concentrated. This result seems highly improbable and is likely the result of some

minor difference in the way Barclays has classified items relative to other Banks.

56

Calculated for the 33 banks for which we have their BSM returns. 57

Calculated for the 33 banks for which we have their BSM returns.

40


Figure 20: Market share in SME term deposits



86. Figure 20 above depicts the share of banks in SME term deposits which accounts for 42

per cent of SME deposits. The market for SME term deposits is unconcentrated with an

HHI of 882.

5.1.1.3. Personal banking

87. We now analyse concentration in the third market segment, namely personal banking.

Figure 21 and Figure 22 below show the market shares of banks in personal lending and

deposits as of December 2013.

Figure 21: Market share in personal lending



41


Figure 22: Market share in personal deposits



88. The cumulative market share of the top four banks is 54 per cent in lending and 44 per

cent in deposits. The HHI is 988 and 770 for lending and deposits respectively, implying

that overall personal lending and deposits are unconcentrated.

Concentration in personal lending products

89. Similar to our analysis of lending products for the corporate and SME segments, we now

present our analysis of personal lending product categories.

Figure 23: Market share in personal overdrafts



42


90. Figure 23 above depicts the market share of the different banks in personal overdrafts.

Overdrafts comprise 6 per cent of personal lending.58

With an HHI of 982, personal

overdraft lending is unconcentrated.

Figure 24: Market share in personal term loans



91. Figure 24 shows the market share of different banks for personal term loans. Term loans

make up 94 per cent of personal lending.59

With an HHI of 1047 the market for personal

term loans is unconcentrated.

Concentration in personal deposit products

92. Similar to the analysis in prior sections, we now look at concentration in deposit products.

58

Calculated for the 33 banks for which we have received the BSM returns. 59

Calculated for the 33 banks for which we have received the BSM returns.

43


Figure 25: Market share in personal demand deposits



93. Figure 25 above shows the share of various banks in personal demand deposits as of

December 2013. With an HHI of 884, this market can be considered as unconcentrated.

Demand deposits comprise 26 per cent of personal deposits.60

Figure 26: Market share in personal saving deposits



94. Figure 26 above shows the share of different banks in personal saving deposits. Personal

saving deposits account for 32 per cent of personal deposits,61

and this market is highly

60

Calculated for the 33 banks for which we have received the BSM returns. 61

Calculated for the 33 banks for which we have received the BSM returns.

44


concentrated, with an HHI of 3008. Further analysis is required on what this means – it

may mean that whereas most of the banks have classified their transactional accounts as

demand deposits Equity has classified their transactional product as a saving product.

Figure 27: Market share in personal term deposits



95. Term deposits comprise 42 per cent of personal deposits, and with an HHI of 647, this

market can be said to be unconcentrated.

5.1.1.4. Some specific lending products

96. For some lending products data was available only on an aggregate basis and not by

market segment. These products are (i) mortgage loans, (ii) consumer durable loans and

(iii) credit cards. We analyse the concentration in these products in this section.

Mortgage loans

97. Mortgage loans are an important category of secured loans for the banking industry.

However, banks in Kenya face some challenges in operating in this product market. As

this is primarily long term lending, typically for 20 years, the banks would require long-

term financing to fund the sector. Often banks in Kenya struggle to attract long-term

deposits. As of December 2013, 99.75 per cent of total deposits with the 33 banks for

which we have mortgage loans data were for 5 years or less.62

Other sources of long term

funding such as equity or loans by donor agencies also have limited scope. Figure 28

shows the market shares for the banks based on the value of total mortgage loans as of

December 2013. The top four banks account for 70 per cent of such loans. It is clear from

the figure that the market is characterised by the presence of a number of evenly placed

players. With an HHI of 1423, the mortgage loans market is unconcentrated, which will

likely reduce further if one considers the other banks active in this market. Mortgage loans

62

Excluding interbank transactions

45


for the 33 banks accounted for 13 per cent of their total loans outstanding as of December

2013.

Figure 28: Market share in mortgage loans



98. Another source of mortgage data is CBK’s Annual Bank Supervision Report for 2013,

which contains information on residential mortgages for each bank. Analysis of that data

shows that the residential mortgage market is also unconcentrated with an HHI of 1471.

99. Note that while the above analysis is done only for commercial banks, other important

sources of competition in the mortgage market are microfinance institutions and SACCOs.

Anecdotal evidence suggests that these institutions are active in disbursing mortgage

loans in Kenya. While mortgage lending by these institutions together may be a large

proportion of total mortgage lending, individually they are likely to be small, further

reducing the concentration measure noted above. However, we do not have the data to

calculate the HHI after including these institutions.

Consumer durables loans

100. Another important category of loans in the personal banking segment is consumer

durables. Figure 29 shows the market shares for banks based on loans and advances

given for consumer durables using data for the 33 banks for which we have this data.

Consumer durable loans appear to be dominated by Equity Bank, and nearly 85 per cent

of the market is served by Equity Bank and Family Bank. With an HHI of 4467, consumer

durables is highly concentrated. Consumer durable loans, as a proportion of total loans is

4.3 per cent as of December 2013.63

Data on consumer durable loans by the remaining

10 banks would be needed to come to a definitive conclusion regarding concentration in

this market.

63

Note the consumer durables in Dubai Bank’s December 2013 BSM returns was blank so for calculating market shares and share of consumer durables in total loans we have assumed that consumer durable loans outstanding were the same as in May 2013, i.e. KSH 481,432,000.

46


Figure 29: Market share in consumer durable loans


Credit cards

101. Credit cards form 0.4 per cent of total lending. In Figure 30 below, we show the market

share based on the total credit card amount utilised as of December 2013. It can be seen

that Barclays is the largest player with a market share of 47 per cent. With an HHI of

2658, the market is highly concentrated but as noted above the share of this market is

insignificant.

Figure 30: Market share in credit cards amount utilised

Source: CBK; Bank financial reports; Genesis calculations

47


5.1.2. Concentration in counties in Kenya

102. While the preceding concentration analysis has been done for entire geography of Kenya,

it is also important to analyse concentration levels within the different counties. This is

because competition between banks can be local, especially in the SME and personal

banking segments. If a particular county has high concentration, then it may a reflect lack

of competition between banks in that county.64

This would be detrimental to consumers as

it may not be viable for them to go to banks in another county. Note that because of data

constraints this analysis has been done only for overall lending and deposits, the most

aggregated categories, for the 33 banks which have given consent.

103. Figure 31 below shows the distribution of Kenya’s 47 counties according to the level of

HHI in those counties, calculated from market share of banks in overall lending.65

The HHI

ranges from 781 for Nairobi City to 10,000 in Elgeyo/Marakwet. On the basis of lending

HHI, only 8 counties can be classified as unconcentrated, while 12 can be classified as

moderately concentrated. Bank lending is highly concentrated in 27 counties in Kenya.

These 27 counties, however, accounted for only 8 per cent (KSH 101 billion versus a total

of KSH 1.2 trillion) of total lending by banks as of December 2013.66

Figure 31: Lending HHI by county


104. Similarly, Figure 32 shows the distribution of counties according to the level of HHI in

those counties, calculated from market share of banks based on deposits. The HHI

ranges from 611 for Mombasa to 10,000 in Elgeyo/Marakwet. On the basis of HHI, only 6

counties can be classified as unconcentrated, while 11 can be classified as moderately

concentrated. Therefore, deposit taking is highly concentrated in 30 counties in Kenya. Of

these 30 counties, 26 are also highly concentrated on the lending market side. However,

64

Note this analysis has been done for 33 banks. As such, all HHI numbers are overestimates and provide an upper bound on the level of concentration in a county. 65

See Appendix B for the lending as well as deposit market HHI by county. 66

Moderately concentrated counties had 6.4 per cent of total lending. Unconcentrated counties had 85.6 per cent of total deposits.

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Elg

eyo/M

ara

kwet

Nya

mira

Baringo

Lam

u

Tana R

iver

Mandera

Mars

abit

Wajir

Turk

ana

Thara

ka

West

Pokot

Sia

ya

Sam

buru

Gariss

a

Nya

ndaru

a

Bom

et

Mig

ori

Vih

iga

Kirin

yaga

Maku

eni

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48


deposits in these 30 counties comprised only of 5.3 per cent of total deposits as of

December 2013.67

Figure 32: Deposit HHI by county


105. It is to be noted that the counties that are most unconcentrated in both lending and

deposits, Kisumu, Nairobi City, and Mombasa have among the highest urbanisation rates

in Kenya.68

In contrast, counties with the lowest urbanisation levels such as Tharaka Nithi,

Narok, and Pokot are highly concentrated. Therefore there does seem to be a relationship

between concentration and the level of urbanisation in the county. However, this

relationship is not perfect. For example, counties such as Kisii are unconcentrated despite

having a level of urbanisation slightly more than 20 per cent, while counties like Migori are

highly concentrated despite being approximately 30 per cent urban.

106. Geographic market concentration depends on the number of banks operating within a

county. For example, in the 27 counties where lending is highly concentrated, on average

there are 4 banks, while in the remaining 20 counties, on average there are 13 banks.

This suggests that limited geographic reach of banks, in terms of the number of counties

they are operating in (which depends on the reach of their branch and agency network

etc.), is one reason why some counties are highly concentrated. Table 6 shows the

number of counties a bank operates in, its total number of branches and sub-branches,

agencies, and ATMs for the 33 banks for which we have data in order to illustrate the

geographic reach of each. It is clear that KCB, Equity Bank, Barclays have the greatest

geographical reach in terms of the number of counties they operate in, while most banks

are in fewer than 20 counties.

Table 6: Geographic reach of Kenyan banks in terms of branches and sub-branches, agencies and ATMs

Bank Number of counties

present in

Branches and sub-branches

Agencies ATMs

67

Deposits in moderately concentrated county comprised of 8.4 per cent of total deposits. Deposits in unconcentrated counties comprised of 86.2 per cent of total deposits. 68

http://siteresources.worldbank.org/INTAFRICA/Resources/257994-1335471959878/Kenya_County_Fact_Sheets_Dec2011.pdf

-

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49



present in


Agencies ATMs

Kenya Commercial69

46 176 6410 347

Equity Bank 44 160 8149 520

Barclays70

36 118 0 225

Family Bank 24 70 670 118

National Bank 24 57 3 109

K-Rep 23 36 0 33

Diamond Trust Bank71

17 46 460 37

Standard Chartered 17 37 3 98

Bank of Africa 12 29 0 29

Ecobank72

11 25 0 60

Consolidated Bank 11 17 28 18

Transnational Bank 10 16 0 16

Stanbic 9 23 0 41

Jamii Bora Bank 8 21 0 0

Housing Finance 8 14 0 12

NIC 7 26 0 24

Imperial Bank 7 25 0 16

I&M Bank 7 21 0 29

Fina Bank 7 14 0 11

Bank of Baroda 7 10 0 0

Credit Bank 7 10 0 3

Gulf African Bank 5 13 0 8

Oriental Commercial Bank 5 8 0 0

Fidelity Bank 4 10 0 7

Guardian Bank 4 8 0 0

Giro Bank 3 7 0 0

Habib Bank Limited 3 3 0 0

Dubai Bank 2 4 0 0

Habib A.G. Zurich 2 4 0 0

Citibank 2 2 1 0

Middle East Bank 2 3 0 1

Development Bank Limited 1 2 0 0

69

In addition, KCB has 534 pay-points. 70

In addition, Barclays has 28 prestige centres. 71

In addition, DTB has 1 pay-point. 72

In addition, Ecobank has 1 pay-point.

50



present in


Agencies ATMs

Victoria Bank 1 2 0 0

Source: CBK

5.1.3. Conclusion

107. With 43 banks, the Kenyan banking industry is unconcentrated at an overall level. The

preceding analysis has helped us identify product markets of the Kenyan banking industry

that are highly concentrated. We find that all the lending side markets (with the exception

of credit cards and consumer durables) and most deposit side markets are not

concentrated. The deposit side markets that are moderately or highly concentrated

(saving deposits for all segments) have a small share in total deposits, with the exception

of personal savings.

108. Our analysis has also identified the extent of banking concentration in different counties in

Kenya. While we note that a majority of counties are highly concentrated in terms of both

lending and deposits, the share of those counties in overall lending and deposits is low.

We observe that the high level of concentration seems to occur because of the limited

geographic reach of most banks. The next section discusses the potential barriers to entry

and expansion, some of which could be resulting in the observed high geographic

concentration.

5.2. BARRIERS TO ENTRY AND EXPANSION

109. This section aims to understand the possible entry barriers and the barriers to expansion

that may exist in the banking industry in Kenya, or in particular market segments or

product categories within this industry. These barriers can arise from either regulatory

requirements or characteristics of the products and consumer preferences. We discuss

both these factors below.

5.2.1. Entry barriers from regulatory requirements

110. Requirements put in place by the regulator that banks must adhere to can result in entry

barriers for new potential entrants and thus decrease competitive pressure on

incumbents. Regulation may impose entry barriers through, for instance, the requirement

to have a minimum amount of capital at the outset and the requirement to demonstrate fit

and proper criteria of solvency, integrity and competence.

111. The OFT in its market inquiry into entry barriers in the retail banking industry considered

the following regulatory requirements and processes for analysing barriers to entry: (i)

obtaining authorisation from the FSA to be able to accept deposits and offer mortgages

(ii) obtaining a consumer credit licence from the OFT to offer credit to customers, and (iii)

ongoing regulatory requirements faced by firms to offer retail banking services, such as

capital and liquidity requirements, money laundering regulations and consumer protection

51


regulations.73

Based upon its analysis, and responses of banks, the OFT found that there

weren’t any significant entry barriers due to the above regulatory requirements.

112. In Kenya, to offer retail banking products a firm typically needs to be authorised by the

CBK. This requires:

o obtaining authorisation from the CBK to be able to accept deposits and offer mortgages and

o meeting on-going regulatory requirements faced by firms to offer retail banking services, such

as capital and liquidity requirements, money laundering regulations and consumer protection

regulations.

113. In order to obtain authorisation, a potential entrant is required to apply for a banking

licence. The requirements of a license are, however, not onerous and not likely to be

significant barriers to entry. The on-going regulatory requirements such as the capital

requirements of KSH 1bn is not particularly onerous, especially given that there are 43

banks in the industry. Further, it is lower or similar to the capital requirements in similar

countries as noted in Table 7. Kenya is following a similar Basel regulatory regime as

other similar African countries.

Table 7: International comparison of regulatory requirements to run/start-up a bank

Country Type of

bank

Minimum capital

requirement (USD)

1

GDP (USD millions)

2

Capital requirement

relative to GDP (%)

Minimum capital adequacy ratio

2

Nigeria International 307.3 522,638 0.06% 15%

Commercial 153.7 522,638 0.03% 10%

Regional 61.5 522,638 0.01% 10%

Ghana Commercial 39.9 47,929 0.08% 10%

South Africa

Commercial 23.2 350,630 0.01% 10%

Kenya Commercial 11.4 44,101 0.03% 12%

Uganda Commercial 9.5 21,483 0.04% 12%

Tanzania Commercial 9.0 33,225 0.03% 12%

Community 1.2 33,225 0.00%

Botswana Commercial 0.6 14,788 0.00% 15%

Source: 1) World Bank, 2014, 2) Respective Central Bank websites, 2014

Notes: Capital adequacy ratios exclude any conservation buffers

114. Given this it is unlikely that regulatory requirements can be seen to be overly burdensome

on potential entrants, and therefore are unlikely to be considered significantly higher entry

barriers into the banking sector in Kenya relative to other markets

115. That the Kenyan regulations do not create a significant entry barrier was also confirmed in

interviews with some banks. Further, the ensuing comparison of Kenyan regulations with

other countries also confirms that Kenya does not impose particularly stringent conditions

on banks.

73

OFT inquiry into barriers to entry, expansion and exit in retail banking. 2010.

52


5.2.2. Other barriers to entry and expansion

116. Besides regulations, there can be other barriers to entry in the banking industry. Banking

is characterised by economies of scale. Therefore, successful entry hinges on the ability

of the entrant to achieve the minimum scale that makes its operations profitable. The

barriers for a potential entrant to expand rapidly can thus become an important part of the

entry decision. If there are significant barriers to expansion, it is possible that an entrant

would not able to achieve the minimum scale of operations, thereby discouraging entry.

117. Barriers to expansion can also reduce the constraint that smaller banks have on large

banks. Even if a small bank charges a lower price than a larger bank, if it is unable to

expand in order to serve customers of larger bank then the actual competition between

large and small banks is reduced.

118. There have been suggestions that there are several constraints on the small and medium

banks in competing with the large banks in Kenya. The problem is particularly acute in

relation to attracting deposits, as large banks tend to get a large share of the deposits at a

low cost.74

To achieve growth in lending, a bank needs to attract deposits. Similar issues

have been voiced by stakeholders in our consultation process. Three factors are

important in determining the ability of bank to expand:

118.1. Branch network

118.2. Branding

118.3. Ability of customers to switch banks

119. We discuss each of these factors and how it can create a barrier to expansion for entrants

and other small banks. It is important to note that this issue is not unique to Kenya.

Regulators in other countries have also identified similar constraints on small banks. For

example, while the OFT’s market inquiry discussed above did not find entry barriers from

regulation, it did find other barriers to enter and expand in the retail banking. In particular,

the OFT also considered the three factors listed above in analysing barriers to expansion.

Branch and ATM Network

120. Widespread branch and ATM networks are an important pre-requisite to achieve growth

in the retail segment, despite the increasing role of ICT in banking. Establishing a branch

network can be a costly and time consuming process and can, therefore, act as a barrier

for a bank to expand its business, particularly in the SME and retail segment where

potential customers may be in small towns and rural areas.75

Similarly, it is important for

consumers that they are easily able to access an ATM to make payment transactions.

From our consultation process, we understand that often small banks can face high costs

from having to create a network of ATMs from scratch, due to lack of interoperability in

payment systems between large and small banks.76

There is a large difference in the

ATM network of different banks in Kenya, as shown in Table 6. Large banks such as

Equity bank, KCB and Barclays have much bigger number of ATMs than smaller banks.

74

World Bank. 2013. Reinvigorating growth with a dynamic banking sector. 75

Bank interviews. 76

This has also been observed by other parties, for example see Daily Nation, 19 February 2014, Committee to probe bank rates a wise move; now demystifying its operations.

53


Thus, if there is limited interoperability between these banks and a small bank, while the

payment systems among the large banks is interoperable, then this can give the large

banks an advantage over small banks. This can also happen if the fee charged by

between banks for use of their ATM network is high.

121. The OFT in its market inquiry also found that branch network can be a barrier to expand

for certain banks:

“For providers who seek to achieve a large-scale retail banking presence rapidly, an

extensive branch network with associated customer base appears to be an essential

prerequisite. Without such a network, they will be unable to effectively compete against

the major incumbents. In contrast, for those providers who favour a more organic growth

path or who choose to focus on a particular consumer segment, the lack of an extensive

branch network in the short-term will not necessarily pose a barrier to expansion”.

122. In Kenya the regulators have proactively tried to address this through the introduction of

Agency banking which significantly reduces the cost of developing a network of branches.

Branding

123. Branding can play a role in enabling expansion in any industry. This is true for the Kenyan

banking industry as well. Some banks have indicated that branding is particularly

important for attracting deposits as Kenyan consumers are often hesitant to deposit

money with smaller and less established banks unless there is a significant differential in

the interest rate paid by large and small banks. This could be due to perceived risks of

depositing money in smaller banks. This can negatively affect the interest costs of small

banks and can create a barrier for the banks to expand. The negative impact of lack of

branding can exist in all three market segments.

124. The OFT also found that brand value plays an important role in affecting consumers

choices such that consumers are hesitant in switching to an unknown brand. This can be

a barrier to expand for smaller banks particularly because they may not be able to make

the investments needed to create the level of brand awareness that large banks have.77

Ability of customers to switch banks

125. A prominent constraint on expansion for small and medium banks is low switching by

account holders. For instance, the OFT review of barriers to entry, expansion and exit in

retail banking78

found that the greatest barrier to entry was convincing holders of personal

current account and SME customers to switch their accounts.79

According to the OFT, the

low inclination for clients to switch made it difficult for new entrants to achieve the

necessary economies of scale required to cover the initial large fixed costs. The OFT

further found that low switching rates may be a barrier to entry in other banking markets

owing to the fact that current accounts may be linked to the availability of other products

such as loans, and that consumers lack of appetite for switching may not incentivize

banks to raise the standard of their services in order to retain their clients. Similar studies

in South Africa found that the level of switching between bank accounts was lower for

77

OFT inquiry into barriers to entry, expansion and exit in retail banking. 2010. 78

Review of barriers to entry, expansion and exit in retail banking, Office of Fair Trading, November 2010. http://www.publications.parliament.uk/pa/jt201314/jtselect/jtpcbs/27/27v_we20.htm 79

The research showed that historically switching was slightly higher for mortgages and credit cards.

54


customers having a large number of debit orders.80

In fact, banks wishing to enter the

market have to provide guarantees to customers that they will manage the cost of moving

their debit orders by contacting all the companies that have been granted a debit order by

the consumer.

126. Data suggests that in Kenya many customers are multi-banked, and the use of debit

orders is not widespread so that the switching constraints noted above are less

applicable. Instead a more important constraint to switching accounts is likely to be the

linking of the provision of credit to holding a current account with an institution that is

providing the credit. Whereas banks can thus compete for the current account, by offering

an equivalent loan, early redemption / pre-payment fees can inhibit such switching, as can

a slow or complex process of closing a credit facility. Establishing an appropriate code of

conduct to ensure that the bank which is losing any facility acts with appropriate speed

and diligence, and potentially outlawing early repayment penalty fees are appropriate

regulatory interventions. However, further field research to confirm current practices is

needed before any such intervention.

127. Another important factor for switching is consumers being able to calculate the price being

charged to them and compare the prices charged by different banks. Price competition in

the banking market requires consumers to switch to another bank in response to higher

deposit rates or lower lending rates, and lower non-interest fees.

128. In Kenya, lack of price transparency in financial products has been an area of concern.

Retail customers are often not able to calculate the full cost of borrowing, in terms of

interest and fees, because banks do not share full information with the customers. This in

turn affects their ability to compare rates and fees of different banks, and switch in

response to rate and fee differentials. As a result of reduced switching, there is limited

competitive constraint imposed by one bank on another. This can be an entry barrier as a

new bank may struggle to attract customers from existing banks. Note that the OFT found

in its market inquiry that the rate of switching in retail banking in the UK was low, and

noted price transparency as one factor behind low switching rates.81

129. This reduced switching due to lack of transparency, however, may not be applicable to

corporate customers who are better informed and financially more savvy. We understand

that they compare interest rates of different banks and switch in response to small interest

differentials. Through the recent changes in the Prudential Guidelines, the CBK has

requested banks to publish their total cost of credit, including interest as well as non-

interest costs, and this may increase price transparency and thus competition among

banks going forward. Banks would need to provide clear details regarding all aspects of a

deposit or loan such as the nature of the interest rate, the method of calculating interest,

the repayment schedule etc. These changes are discussed in detail in Appendix A.

Another on-going initiative of the CBK is the Kenya Banks Reference Rate (KBRR), which

was introduced to make the industry more transparent and competitive. The KBRR, which

will be the base rate for all commercial banks’ lending, is expected to enhance

80

A Debit Order is an authority granted to a company to debit a customer’s account on a monthly basis for a service that has been provided. 81

The OFT has implemented several measures to improve price transparency to increase switching rates. OFT inquiry into barriers to entry, expansion and exit in retail banking. 2010.

55


transparency regarding the cost of credit as banks and mortgage finance companies will

have to explain any deviation of their lending rate from the KBRR to their borrowers.82

130. To conclude, the analysis of barriers to entry has shown that there are insignificant

barriers to entry in the Kenyan industry. This is particularly because of relatively lower

requirements of minimum capital to enter by the CBK, and is evidenced by a large

number of banks existing in the industry. However, there may be barriers to expansion for

small banks, particularly in the SME and personal market segments, due to issues such

as need for extensive branch network, importance of branding and the lack of price

transparency. Potentially, these barriers may reduce competition in the market if it is also

concentrated. We would examine these issues in the section 5.4.

5.3. BUYER POWER

131. We now turn to the third factor for assessing market structure, namely buyer power. Buyer

power reflects the ability of the buyer to ensure a competitive price. This happens when

the buyer can credibly threaten to reduce demand upon an increase in price by either

deferring purchase or by turning to an alternative supplier.

132. In the banking industry, the degree of buyer power differs by market segment, as the

consumer group in each segment has different characteristics. In the corporate segment,

since the value of both loans and deposits are very large, the customers typically have

large countervailing buyer power. Our interviews suggest that corporates typically

consider 5-6 banks before borrowing or depositing money, and negotiate aggressively to

get the best deal. As corporates are likely to be the most sophisticated and informed

consumer group, they are also sensitive to all price elements -interest rates and fees.

133. On the other hand, customers in the SME and personal segments are unlikely to have

significant buyer power vis-à-vis banks because of their smaller size. Further, our

interviews with banks suggest that SMEs and individuals typically do not compare the

interest rates between banks before choosing a bank. The important factors for them are

easy access to credit and good service.

5.4. CONCLUSIONS ON MARKET STRUCTURE

134. We have analysed the key factors that determine the market structure of the Kenyan

banking industry. Based on these factors, we now conclude on the competitive structure

of different market segments and products. We first consider the market segments on an

overall basis, and then discuss products within these segments. We also present our

conclusions on other lending products and overall geographic market concentration.

Market segments

135. Analysis of market structure for the corporate, SME and personal market segments

suggests that at an overall level, each of these segments is competitively structured.

136. Table 8 shows the HHI for the lending and deposit markets. This shows that these

markets are unconcentrated at an overall level for all the three market segments.

82

Central Bank of Kenya. Banking Circular No. 4 of 2014.

56


Table 8: Concentration summary for market segments

Source: Genesis’ Calculations

Note: Green refers to unconcentrated, yellow refers to moderately concentrated and red refers to highly concentrated markets

137. We have also not found any significant barriers to entry for new banks. An analysis of the

regulatory environment has confirmed that Kenya does not have strict or onerous

regulatory requirements to open a new bank which may prevent entry. This is supported

by the fact that the Kenyan banking industry consists of 43 banks and 9 MFBs. Thus,

entry of new banks is likely to be determined by the economic factors such as the

potential profits.

138. Note that there can be some barriers to expansion for a small bank in Kenya in the form

of need for a branch/ATM network and the high cost of doing so, the important role of

branding, and the low likelihood of customers switching between banks because of lack of

transparency in prices. All of these may create constraints for a small bank to induce

customers of large banks to switch, and this barrier to expansion may result in barrier to

entry given the economies of scale in the banking industry.

139. While these barriers may be noted by many as a matter of concern for the SME and

personal segments of the Kenyan banking industry, the fact that the market segments are

unconcentrated indicates that these issues do not appear to be leading to an

uncompetitive market structure in these segments. Further, the barriers to expansion may

not be insurmountable as shown by Equity bank. It is understood that from being a very

small player, Equity bank expanded rapidly by establishing a bigger branch network than

most other banks. Currently, Equity bank is one of the largest banks in Kenya.

140. Another aspect to consider is the buyer power to counteract market power of banks, if

any, exists. It appears that buyer power may exist in the corporate segment but not in the

SME and personal segments. However, since the latter segments are unconcentrated,

the lack of buyer power does not appear to be leading to uncompetitive market structures

in the SME and personal banking markets.

141. While these results are at an overall market segment level, we have also analysed

specific product markets within these segments.

Products markets within market segments

142. Table 9 presents our concentration results for various product markets considered.

Market segment Lending Deposit

Corporate 709 1,149

SME 1,006 849

Personal 988 770

57


Table 9: Concentration summary for products within market segments



143. A concentration analysis of overdraft and term loans shows both lending product markets

to be unconcentrated across the three market segments. On the deposit side, a significant

amount of deposits in the corporate and SME segment is in the form of demand deposits.

The market for demand deposits for all three market segments is unconcentrated with

HHIs of 1,508 and 1,298 and 884 respectively.83

Term deposits are also unconcentrated

across the three segments.

144. High concentration is observed in the saving deposits market. The HHI for saving

deposits in corporate, SME and personal segment is 2,492, 3,125, and 3,008

respectively. Even though corporate savings are concentrated, the presence of buyer

power in the corporate segment diminishes the market power of individual banks making

it likely that market outcomes in this category do not reflect market power of banks.

Further, note that saving deposits are a significant proportion of total deposits for only the

personal segment. In the personal segment saving deposits, Equity Bank has a market

share of 53.2 per cent while the next player is National bank with a market share of only

7.9 per cent.

Specific lending products

145. Table 10 shows that mortgage lending is unconcentrated. However, the concentration

analysis for consumer durables shows high concentration, with an HHI of 4,467. Equity

bank is the market leader in the consumer durables market with a share of 63 per cent.

Credit card loans, in terms of loans outstanding, is also concentrated with an HHI of

2,658.

Table 10: Summary of concentration results for specific lending products

83

Note that technically our results classify the corporate demand deposit market as moderately concentrated, as the HHI at 1508 is just above the threshold of 1500. However it is likely that this number will be below the threshold if data for all other banks were included.

Lending products HHI Deposit products HHI

Corporate Corporate

Overdrafts 767 Demand deposit 1,508

Term loans 797 Saving deposit 2,492

Term deposits 907

SME SME

Overdrafts 1,004 Demand deposit 1,298

Term loans 1,164 Saving deposit 3,125

Term deposits 882

Personal Personal

Overdrafts 982 Demand deposit 884

Term loans 1,047 Saving deposit 3,008

Term deposits 647

58




146. While the concentration is high for consumer durables, it is unclear if there are any

particular barriers in expansion that have resulted in such a scenario. It is possible that

the high market share of Equity bank in consumer durables is because of it being an early

mover in this category, and their special focus on these products. For example, while

Equity bank has a high market share (63 per cent) in consumer durables, its market share

for mortgages is only 3 per cent. This could be because Equity bank has focussed on the

market for consumer durables lending. Indeed, consumer durables loans constitute

around 24 per cent of Equity bank’s total loans. It is also to be noted that the lack of

competition in these categories is unlikely to significantly affect overall market outcomes

as consumer durables loans are only 4.3 per cent of total loans. Similarly, credit card

loans are 0.4 per cent of total loans.

147. While the consumer durables and credit card markets are concentrated and there is no

countervailing buyer power for these lending products as they are likely to be used by

individual consumers, there is no particular barrier to expansion that is likely to exist in

these markets.

Geographic markets

148. In terms of geographic market concentration, while it is true that a majority of counties in

Kenya are highly concentrated in terms of both lending and deposits, the share of those

counties in overall lending and deposits is low. Given data limitation we are unable to

analyse if this concentration is true for particular product categories or for all products.

The high level of concentration seems to occur because of the limited geographic reach of

most banks. Given the economies of scale and the costs associated with expanding

branch and ATM network, barriers to expansion are likely to have resulted in the observed

geographic market concentration.

149. In conclusion, the market structure of the Kenyan banking industry is largely competitive.

The main exception to this is the saving deposits (corporate, SME and personal)

categories, where high concentration has been observed. These deposits attract a low

rate of interest and therefore can give a cost advantage to banks. In addition on the

lending side, markets for credit card and consumer durables are concentrated. However,

this may not reflect uncompetitive market structures since there appear to be no apparent

barriers to entry in these lending markets. Finally, majority of the counties in Kenya have

high levels of concentration but the share of these counties in overall lending and deposits

is low.

Specific lending products HHI

Credit cards 2,658

Consumer durable loans 4,467

Mortgage loans 1,423

59


6. INTEREST SPREAD ANALYSIS

150. Concerns have been voiced in some quarters regarding high lending rates charged by

banks in Kenya, and a high interest spread between the lending and deposit rate in the

country. Given that there are some segments and product markets where concentration is

high, we now analyse the interest rates charged or paid by the banks in Kenya.

6.1. INTERNATIONAL COMPARISON

151. We start with comparing the interest rate spread in Kenya with that in other countries.

This is done using the data on interest rate spreads compiled by the World Bank. In this

data set, the interest rate spread is calculated as the interest rate charged by banks on

loans to private sector customers minus the interest rate paid by commercial or similar

banks for demand, term, or saving deposits. According to this data, the interest rate

spread in Kenya was 8.2 per cent in 2012.84

Interest rate spreads in 2012 ranged from -

2.8 per cent for Belarus to 49.5 per cent for Madagascar. In terms of relative positions,

Kenya had 34th highest spread in 2012. Comparing Kenya to 23 countries in Sub-Saharan

Africa region for which data on interest rate spreads was available, we find that Mauritius

had the lowest spread at 2.4 per cent, while Madagascar had the highest spread at 49.5

per cent, and the average spread was 11.2 per cent.85

Of these 23 countries, Kenya had

the 10th highest spread in 2012.

86 It is to be noted, however, that the terms and conditions

attached to lending and deposits differ by country and this, therefore, limits the

comparability of these spreads.

152. While the comparison of Kenya to other countries is helpful for understanding the position

of Kenya’s banking sector vis-à-vis the banking sector in other countries, the performance

of Kenya’s banking sector is better evaluated by using a more appropriate benchmark of

spreads in countries that are at a similar level of financial development. One reason for

the divergence in the interest rate spreads across countries would be the difference in the

level of financial sector development. A developed financial sector has lower transaction

costs and more efficient resource allocation.87

As the interest rate spread can be

considered as a measure of how efficiently the financial sector acts as an intermediary

between borrowers and lenders, one would expect it to be lower in countries that have

well-functioning financial sectors relative to countries which do not.88

153. We use a standard measure of financial development, the ratio of ‘bank deposits to GDP’,

to identify countries at a similar level of development to Kenya. As of 2011, Kenya’s bank

deposits to GDP stood at 42.5 per cent. We consider all countries for which deposits to

GDP is between 40 per cent and 45 per cent to be comparable to Kenya. Table 11

presents various measures describing the banking sectors of all such countries, including

Kenya.89

Note that all data, including that for spread, has been taken for 2011 for

comparability.

84

Kenya’s spread in 2011 was 9.4 per cent. 85

In 2011, Mauritius had the lowest spread among Sub-Saharan countries at 1.8%, and Madagascar had the highest at 41.9%. 86

Kenya had the 10th highest spread (of 23 countries) in 2011 as well

87 http://data.worldbank.org/about/world-development-indicators-data/financial-sector

88 http://data.worldbank.org/about/world-development-indicators-data/financial-sector

89 In our conversation with KBA officials, we were told that the banking sector in Ghana and Uganda can be

considered as similar to that of Kenya’s. We therefore note that the spread for Kenya in 2011 (9.4%) was higher than

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Table 11: Key banking sector indicators for Kenya and comparable countries

Country Bank Deposits to GDP (%) Spread (%)

Honduras 44.1 10.4

Papua New Guinea 43.1 9.9

Bolivia 41.4 9.5

Kenya 42.5 9.4

Samoa 44.7 7.7

Serbia 41.9 7.4

Algeria 42.4 6.3

Bosnia & Herz. 44.5 4.6

Qatar 44.6 3.7

Hungary 44.8 2.1

Average 43.4 7.1

Source: World Bank data. Spread data is as of 2014 while Bank Deposit to GDP data is as of November 2014

154. From Table 11 we can see that, as of 2011, Kenya’s spread (9.4%) was the 4th highest

among these countries.90

The average spread among these 10 countries stood at 7.1 per

cent.

6.2. INTEREST SPREAD ANALYSIS FOR KENYAN BANKS

155. The previous section compared the interest spreads in the Kenyan banking industry to

benchmarks spreads from other countries to determine if the Kenyan banking industry as

a whole had spreads which were very different. A further issue to be considered is how

spreads within Kenya vary across banks or groups of banks. For this we now look in detail

at the interest rate regime in the Kenyan banking industry.

156. While the public discourse on interest rates in Kenya has focussed on aggregate spreads,

a disaggregated analysis of interest rates is more appropriate to determine if the lending

rates are high or the deposit rates are low. However, when performing a disaggregated

analysis of interest rates, one cannot simply analyse average deposit rates and average

lending rates. One needs to take into account (i) the term structure of the loans and

deposits; (ii) the credit risk of the borrowers, as both will affect the interest rates. Further,

the credit risk of the banks will also influence the deposit rates. Below we present a

discussion of relevant factors to consider for an appropriate interest rate analysis.

Term structure of the loans and deposits

157. A core function of a bank is asset and liability management. In other words, banks accept

deposits with the length of maturity (or tenor) of those deposits being determined by

market supply of funds; and lend out with the tenor of loans being based upon market

demand for funds. A bank will therefore not necessarily be able to match the deposits

received against the loans demanded for each tenor. Since the standard banking practice

is to take shorter term deposits and lend those funds for longer terms, referred to as

that of Uganda’s (8.8%). Data on spread for Ghana was unavailable. We also note that the ROE for Kenyan banks in 2011 (23.1%) was higher than Ghana’s (17.2%) but lower than that of Uganda’s (27.1%) 90

Kenya’s spread, at 8.2%, was the 4th highest in 2012 as well.

61


maturity transformation, a bank’s focus is to ensure there are adequate deposits to fund

its longer term loans.

158. Due to various financial risks and uncertainties, the interest rate paid/received on

deposits/loans will be a function of the instrument tenor. Normally, a shorter tenor will

attract lower interest rates and a longer tenor will attract higher interest rates. Individuals

will demand a high rate on the longer term deposits they place with banks to compensate

for various uncertainties over this time period, such as inflation, the probability of the bank

defaulting etc. and for not being able to access their money for a period of time. The bank

will also charge lending rates based on similar uncertainties; however as this is the asset

side, the probability of the borrower defaulting will be a key determinant of the lending

rates.

159. Thus when analysing deposits and lending rates, one must review the rates by tenor,

thereby removing the effect of differences in rates caused by maturity transformation.

160. The interest rate spread by tenor and market segment is presented in the table below.

Table 12: Lending – deposit by tenor for the Corporate segment

Corporate segment Overdraft91

0-3

months 3-12

months 1-2 years 2-5 years

Over 5 years

Top 4 average 14.8% 8.2% 7.4% 8.3% 7.9% 9.5%

Other banks average 15.5% 7.7% 8.2% 9.4% 10.7% 10.0%

Number of banks 19 25 25 14 7 5

Source: Genesis’ calculations

Top 4 banks are taken as per market share in corporate lending. These are KCB, Standard Chartered Bank, NIC Bank and Equity Bank

Table 13: Lending – deposit by tenor for the SME segment

SME segment Overdraft 0-3

months 3-12


Over 5 years

Top 4 average 16.7% 10.8% 9.2% 8.6% 8.8% 9.6%




Top 4 banks are taken as per market share in SME lending. These are Equity Bank, DTB, I&M Bank, and KCB

Table 14: Lending – deposit by tenor for the Personal segment

Personal segment Overdraft 0-3

months 3-12


Over 5 years

Top 4 average 21.1% 13.2% 11.4% 10.8% 10.0% 10.0%




91

Overdraft spread for all three tables presented here has been calculated by subtracting the saving deposit rate from the overdraft lending rate.

62


Top 4 banks are taken as per market share in personal lending. These are KCB, Barclays, Standard Chartered Bank and Equity Bank.

Credit ratings (riskiness) of Borrowers

161. While the above data is illustrative, in order to draw meaningful conclusions on the

magnitude of the interest rate spread, one must take into account the riskiness of

borrowers. As alluded to earlier, the credit ratings of the borrowers will affect the lending

rates; higher lending rates will be charged to high risk borrowers. The credit ratings of the

banks will also affect the deposit rates offered by the banks; riskier banks will offer higher

deposit rates.

162. We do not currently have data on the credit risk on individual borrowers, or borrower

categories, for any bank. Specific credit data on the borrowers would allow us to

determine whether the high lending rate of a bank or its interest spread is due to the risk

of the underlying borrowers or due to excess profit margins coming from market power.

While one can argue that banks are making large profits because their spreads are high,

if that is indeed the case, further analysis into the composition and riskiness of their

lending portfolio may show high riskiness of borrowers. In this scenario, it is possible that

this profit is being driven by lending to risky borrowers, who run a large risk of defaulting

and wiping out the expected or actual profits. While the NPL ratio (ratio of non-performing

loans to total loans) is a measure correlated with average credit risk, the aggregate NPL

ratio may not necessarily present the full picture on the risks faced by a bank. Firstly,

while the aggregate NPL for a bank may be low compared to other banks, it may still be

giving loans to risky borrowers in particular market segments or for particular products

compared to the other banks. Secondly, it is possible that the NPL ratio is low for a bank

even though it is lending to risky borrowers, if those loans given to high risk borrowers

have not yet turned into non-performing loans.

163. In the absence of credit risk information, one can analyse the lending and deposit rates

for Kenyan banks as a spread against the Kenyan yield curve. The yield curve is

constructed using published inter-bank rates up to one year and published government

bonds rates up to 30 years. The curve effectively reflects the prevailing risk free rate.

Therefore the spread between the lending rate and the yield curve would approximate the

average credit rating for the borrowers. The spread between the deposit rate and the yield

curve would approximate the riskiness of the bank; however, it must be noted that the

deposit rate would normally be below the yield curve as the bank would offer a lower

deposit rate than the rate it would lend at to its borrowers (which would be on or above

the yield curve). A larger deposit to yield curve spread would signify a lower credit risk of

the bank. In many instances banks will offer zero rates on its current and demand

deposits.

164. One would expect bigger banks to be lending to better quality borrowers, and thus be

charging lower lending rates; one would also expect the bigger banks to be offering lower

deposit rates as they are a safer credit risk for borrowers.

165. One the other hand, one would expect smaller banks to be charging higher interest rates

as they may be lending to “riskier” individuals and offering higher deposit rates as these

banks have a lower credit rating than the big banks and must offer higher rates to attract

depositors.

63


166. Due to lack of data, we have not analysed the credit risk of the borrowers for different

banks within each market segment and tenor. We can, however, comment on the overall

quality of a bank’s borrowers by observing the ratio of its non-performing loans to total

loans. As of December 2013, this ratio for the top four banks in the Kenyan banking

industry (on the basis of value of total loans) i.e., KCB, Equity Bank, Standard Chartered

and Barclays on average was 4.6 per cent. The average for the remaining 29 banks for

which we have this data was 8.2 per cent, highlighting the fact that bigger banks tend to

have better quality borrowers at an aggregate level.

167. The above discussion on tenor and credit risk does not imply that the other operating

costs faced by banks are not relevant in determining the lending rate. In the long run, a

bank would want to charge an interest rate such that it covers for its operational costs, in

addition to a earning a profit margin. This margin would be adjusted by a bank according

to the risks noted above but also according to the level of competition it faces. Margins

are expected to be lower where competition faced by a bank is intense compared to a

situation where the bank does not face any competition. We analyse the margins of

Kenyan banks and their profitability in Section 7.

168. Our objective is to assess if banks which have a higher market share are charging a

higher lending rate or offering lower deposit rates than other banks, and to assess if so,

whether this outcome is being driven by lack of competition. We undertake this analysis

for lending and deposit products in the three segments for the 33 banks for which we

have interest rate data. The products on the lending side and overdrafts and term loans

(split by tenor), and the products on the deposit side are demand deposits, saving

deposits and term deposits (split by tenor). We examine the lending rate/deposit rate over

the risk free rate for all these markets, and compare average interest rates of the largest

four banks by market share in each market to the average interest rates of the other

banks. We then tie our observations on interest rates to our observations on market

concentration to identify areas of concern in the Kenyan banking industry.

6.2.1. Analysis of lending and deposit rates

169. As explained above, a comparison of overall lending rates and deposit rates across banks

which have different profiles of loans and deposits in terms of tenor is not correct. We

compare the average interest rates by tenor for the top four banks and other banks in

each market.92

Only local currency transactions are used as it is observed that interest

rates for local currency transactions differ significantly from foreign currency transactions

and therefore can affect the results. This is also justified as this analysis allows us to find

if lending rates are high or deposit rates are low for local transactions. In lending we

consider the categories of overdrafts, and loans with tenor 0-3 months, 3-12 months, over

1-2 years, over 2-5 years and over 5 years. In deposits we consider the categories of

demand deposits, saving deposits, and deposits with tenor 0-3 months, 3-12 months, over

1-2 years, over 2-5 years and over 5 years. Data on interest rates for 31 banks has been

obtained from Table F (New) of CBK's BSM returns; Dubai Bank and Consolidated Bank

lending rates have been obtained from Table F instead.

170. To assess market power in the lending and deposit markets, one can analyse the spread

of lending rates and deposit rates over the risk-free rate – the lending spread and deposit

92

When identifying the top 4 banks in the different tenor buckets of term loans and deposits, we consider the overall market share of banks in overall term loans and deposits respectively.

64


spread. These spreads measure the average risk premium being charged and paid by the

banks respectively. If a bank charges greater premium than another bank for borrowers

with similar credit risk, this is an indicator of lending rates being too high, all else being

equal. Similarly, if a bank is offering a lower risk adjusted rate than other similar banks,

this is an indicator of too low deposit rates.

171. We use the yield curve in the Kenyan financial market depicted in Figure 33 to calculate

the risk free rate for different tenors (average of o/n and t/n93

, 0-3 months, 3-12 months, 1-

2 years, 2-5 years and over 5 years). The information has been sourced from Kenya

Commercial Bank and Commercial Bank of Africa. For less than 1 year, the yield curve

maps the money market interest rates, obtained from Bloomberg, while for maturities

greater than 1 year, the government bond yields supplied by Nairobi Stock Exchange

have been used. Bond issues extending up to 30 years were considered.

Figure 33: Yield curve for the Kenyan banking industry in December 2013

Source: KCB and CBA banks: Bloomberg less than 1 year; NSE government bonds greater than 1 year

172. To calculate the lending spread and the deposit spread we subtract the risk free rates for

the different tenors from the lending and deposit rates for these tenors. Note that for

overdrafts, as well as saving and demand deposits we subtract the average of the o/n t/n

rate.

173. We first present the lending spread for the Kenyan banking industry in Table 15. The

lending spread has been calculated for each market segment being considered. The

spread is lowest in the corporate segment at 5 per cent while the spreads for SME and

personal segments both are 8.0 per cent respectively. This reflects the fact that lending to

corporate customers has lower risk compared to retail customers. Interestingly, the credit

risk appears to fall with greater tenor, which is counterintuitive. This is possible if longer

93

O/N is the overnight rate while T/N is the interest rate between tomorrow and the next day. Both are short-term interest rates.

65


tenor loans reflect secured loans like mortgages and therefore have lower risk despite

having a longer tenor.

Table 15: Lending spread in the Kenyan banking industry for local currency transactions

Overdraft

/Loan 0 to 3

months

Over 3 to 12

months

Over 1 to 2 years

Over 2 to 5 years

Over 5 years

Overall

Corporate 6% 6% 5% 5% 5% 2% 5%

Business/SME

10% 8% 9% 7% 7% 5% 8%

Personal 11% 8% 9% 6% 8% 4% 8%

Overall 8% 6% 7% 6% 7% 4% 7%


174. We now present results of tenor wise analysis of lending spread for the corporate, SME

and personal segment. Appendix D shows the spread by bank.94

174.1. Corporate. Table 16 presents the results for the corporate segment. Average

lending spread for the top four banks is lower than for other banks in all tenors.

174.2. SME. Table 17 shows that the average lending spread is either lower or same for

the top four banks as for the other banks in all but one tenor.

174.3. Personal. Table 18 shows average lending spreads for the personal segment. The

average lending spread for the top four banks in each category is higher than for

other banks in all tenor categories.

Table 16: Lending spread in the corporate segment

Lending Overdraft 0-3

months 3-12


Over 5 years

Top 4 average 5.4% 6.7% 5.4% 5.2% 4.2% 1.7%


Number of banks 25 28 28 28 28 26


Table 17: Lending spread in the SME segment


months 3-12


Over 5 years

Top 4 average 10.0% 9.5% 7.0% 5.5% 4.8% 4.3%


Number of banks 26 24 25 26 25 21


94

Appendix E contains this exercise for 2012.

66


Table 18: Lending spread in the personal segment


months 3-12


Over 5 years

Top 4 average 12.2% 11.0% 9.4% 8.7% 7.6% 5.1%


Number of banks 27 25 27 28 29 28


175. The analysis of lending spread shows that, with the exception of the 0-3 month tenor in

the SME segment, average spreads for overdraft and term loans are not higher for the top

four banks compared to other banks in the corporate and SME segments. However in the

personal segment average lending spreads for the top four banks are higher in all

categories. Note that these results hold true even when we compare top three or top five

banks with the remaining banks.

176. We now present results of tenor wise analysis of the spread of deposit rates over the risk

free rate (deposit spread) for the corporate, SME and personal segment. The detailed

data on deposit spread for each bank is presented in Appendix D.95

176.1. Corporate. Table 19 presents the average deposit spread for the corporate

segment. We see that in the tenors 0-3 months, 3-12 months and 1-2 years the

average deposit rate of the top four banks in term deposits is lower than the

average for other banks.96

176.2. SME. Table 20 shows that in the SME segment the average deposit spread is

lower for the top four banks as compared to the average for other banks in all

deposit categories.

176.3. Personal. Table 21 shows that in personal demand and saving deposits, and

personal deposits of over 5 years, the average deposit spread is lower for the top

four banks.

Table 19: Deposit spread for corporate segment97

Deposit Demand Saving 0-3

months 3-12

months 1-2

years 2-5

years Over 5 years

Top 4 average -5.0% -5.2% -2.7% -2.7% -5.2% -2.7% -5.7%

Other banks average -7.1% -7.1% 0.5% -1.5% -2.3% -6.5% -5.7%

Number of banks 28 22 27 27 15 8 4


95

Appendix E contains this exercise for 2012. 96

The average of the top 3 in savings, -7.0 per cent, is lower than the average of the others, -6.7 per cent. 97

The deposit spread was calculated as the difference in the local currency deposit rate (obtained from the BSM form of the banks for each segment) and the risk free rate (as in Appendix D). This was done separately for each tenor. The spreads were then averaged for top 4 and other banks. The spreads are negative since deposit rates are generally lower than the risk free lending rate we calculated.

67


Table 20: Deposit spread for SME segment


months 3-12

months 1-2

years 2-5

years Over 5 years

Top 4 average -8.4% -7.2% -1.1% -1.8% -3.1% -5.3% -7.0%

Other banks average -7.5% -6.5% -0.6% -1.6% -2.6% -3.0% -4.2%

Number of banks 26 19 24 22 12 10 6


Table 21: Deposit spread for personal segment


months 3-12

months 1-2

years 2-5

years Over 5 years

Top 4 average -8.0% -8.0% -0.8% -2.0% -2.8% -3.3% -6.9%

Other banks average -7.9% -6.5% -1.2% -2.3% -4.3% -3.6% -6.8%

Number of banks 27 27 27 26 19 12 9


177. Average deposit spreads for demand and saving deposits are not lower for the top four

banks compared to other banks in the corporate segments, but they are lower in the SME

and personal segments. Further, the average deposit spread of the top four banks is

lower than the average of other banks for term deposits of specific tenors across market

segments.

178. It is to be noted that the preceding analysis has limitations in that factors such as the

inherent heterogeneity across banks, which directly influences the deposit rate, and the

variation in riskiness of their customers, as well any security applied (e.g. real estate,

other assets, etc.), both of which directly influence the underlying lending rate, have not

been adjusted for in our comparison. Therefore, at least some of the difference in the

rates charged/offered by the top four banks and those charged/offered by the remaining

banks is driven by such factors.

6.3. LENDING AND DEPOSIT SPREADS AND CONCENTRATION

179. In the preceding section we noted the particular product categories where the average

lending (deposit) spread of the top four banks by market share in that product-segment

was observed to be higher (lower) than corresponding spread of other banks.

180. In order to determine whether these outcomes are a result of lack of competition in

particular markets, we tie the results of the preceding section to our results on market

concentration. In markets where we observe a higher lending spread/lower deposit

spread for the bigger banks, but is unconcentrated, it is unlikely that the observed interest

rates are a result of a lack of competition. However, in markets where one observes such

spreads for the big banks along with a high degree of concentration, it is plausible that

lack of competition, among other factors, is resulting in the observed rates. In these cases

we will need to isolate the effect of factors such as risk and market concentration on rates

in order to determine if there is anticompetitive conduct.

68


181. Table 22 below illustrates our findings on both, interest spreads and concentration.98

Note

that we have considered term loans/deposits of different tenors together since market

share and concentration has been analysed for term loans/deposits as a whole. We see

that the markets on the lending side where the average lending spread of the top four

banks is higher than the other banks (personal overdrafts and term loans, and SME term

loans over the 0-3 month tenor) are unconcentrated. Further, there are instances in

corporate, SME, and personal term deposits where the deposit spread of the top four

banks on average was lower than that of the other banks, but the corresponding markets

are unconcentrated. Similarly, the markets for SME and personal demand deposits are

also unconcentrated. Low deposit spreads of the top four banks seen here could be a

result of the fact that they are perceived to be safer by customers and hence can attract

deposits at a cheaper rate than other banks.

182. We note, however, that there are two markets which are highly concentrated and have an

average deposit spread of the top four lower than that of the average deposit spread of

other banks. These are SME and personal saving deposits. In these two markets, a high

degree of concentration could be driving the below average deposit spreads. However, it

is important to remember that this outcome could also be driven by the fact that the top

four banks in these cases are banks like Equity Bank, KCB, Standard Chartered etc.

which are perceived safer by depositors and can therefore access deposits despite

offering lower deposit rates. Therefore, while the high level of concentration could be

playing a role, in order to determine the impact of concentration on deposit rates one

would need to understand these markets further.

98

Given the data constraints concentration analysis is based on data for 36 banks (including publically available data for CBA, Co-operative Bank of Kenya, and Chase Bank) while the interest spread analysis is based on data from the BSM form for 33 banks.

69


Table 22: Summary of spreads and concentration


70


7. PROFITABILITY ANALYSIS

183. Profitability is also an indicator of competition between banks. Persistently high profits are

often considered to show lack of competition. Within this section we explore the

profitability of Kenyan banks using two approaches: (i) financial ratio analysis for Kenyan

banks, and (ii) comparison of profitability across different countries.

7.1. FINANCIAL RATIO ANALYSIS FOR KENYAN BANKS

184. Financial ratio analysis is considered to be the industry standard when assessing

profitability and conducting a financial statement analysis. Some of the ratios included in

such an analysis are:

184.1. Net Interest Income (NII) margin – This is calculated by dividing net interest income

(NII) by the total interest earning assets of a bank. It is a measure that reflects net

interest earnings relative to the assets that generate this earning. It can also be

interpreted as the interest rate earned by a bank minus the interest rate paid out

184.2. Non-interest revenue (NIR) margin – This is defined as the ratio of total fees and

commissions earned by a bank to total deposits. This ratio shows the average rate

that a bank charges/earns on the average deposit in fees and commissions.

184.3. Operating cost to income ratio – This is obtained by dividing a bank’s operating

costs to its total revenue. A relatively high ratio shows cost inefficiencies.

184.4. Return on equity (ROE) – This is calculated as the ratio of total profit after tax to

shareholders’ equity. This ratio gives an indication of the return that shareholders

obtain from their capital investment. A relatively high ratio for larger banks is an

indication of supernormal returns and potentially an indication towards an

uncompetitive market. ROE is one of the most important ratios for assessing

profitability and thus it is essential to understand the drivers of this ratio. In this

section we will use DuPont analysis99

to decompose the relevant components of

ROE and to help identify why certain banks are more profitable than others. The

DuPont identity states that ROE is a product of:

184.4.1. Net profit margin – This is defined as profit after tax divided by total

revenue. This ratio shows what percentage of revenue is retained as

profits by banks.

184.4.2. Total asset turnover – This is defined as total revenue divided by total

assets. This ratio shows the revenue generated per asset.

184.4.3. Financial leverage – This is defined as total assets divided by total equity.

This ratio shows the extent to which ROE is driven by larger liabilities.

184.5. Mathematically, this can be depicted as:

99

http://www.jeffersonholmes.com/Analyse-Profitability.pdf

http://www.jeffersonholmes.com/Analyse-Profitability.pdf

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185. The data to calculate these ratios comes from the CBK/PR2188001 form, which gives the

detailed income statement for banks, and Table A of the BSM form, which gives the

balance sheet statement for these banks. Note that we do this analysis only for the banks

which gave consent to the CBK to share their data. For the purposes of comparison,

banks were ranked according to their asset size and segmented into top four banks and

other banks on this basis. Banks with missing data have been omitted from the

analysis.100

The top four banks for this analysis are KCB, Equity Bank, Standard

Chartered Bank, and Barclays bank.101

186. We begin by analysing NII margins. The NII margin, which is calculated by dividing net

interest income by the total interest earning assets of a bank, is a measure that can be

used to compare the interest rate margins that banks are actually receiving. A higher

margin relative to another bank indicates a higher net income per unit asset. This ratio is

also an indication of the average interest a bank makes of its assets after paying its

interest expenses. Table 23 below shows NII margin data for the Kenyan banking sector:

Table 23: NII margin for Kenyan banks in 2012 and 2013

2012 2013

Top 4 banks (A) 9.6% 9.5%

Other banks (B) 6.3% 6.4%

Difference (A – B) 3.3% 3.1%

Source: CBK

Notes: Ecobank has been excluded from the analysis as the bank is undergoing a restructuring. Individual bank ratios can be found in Appendix F and Appendix G

Top 4 includes KCB, Equity Bank, Standard Chartered and Barclays

187. From the above data it is clear that the top four banks are earning a higher net interest

margin than other banks. Two potential explanations exist for this observation; (i) the top

four banks have a lower interest expense than the smaller banks or (ii) they are charging

higher interest rates on their loans. We can explore this further by comparing the average

deposit and lending rates for the banks. The data suggests that higher NII margins for top

four banks is primarily being driven by cheaper cost of funding:102

187.1. As of December 2013, the average deposit rate offered by the top four banks was 3

per cent, compared to 6 per cent of the other banks.103

This implies a gap of 3 per

cent. Since larger banks are on average paying less interest on their deposits these

banks have a cheaper cost of funding. In addition, the top four banks have a higher

CASA ratio of 65 per cent versus 40 per cent for other banks.104

Note that this ratio

100

Banks excluded are; Co-operative Bank of Kenya Ltd, Commercial Bank of Africa Ltd, Chase Bank Ltd, Prime Bank Ltd, Bank of India, African Banking Corporation Ltd, Equatorial Commercial Bank Ltd, First Community Bank Ltd, Paramount Universal Bank Ltd and UBA Kenya Ltd 101

For analysing profitability, we used the income statement (CBK/PR2188001 form) as of December 2012 and December 2013 for banks for which it was available as of that date. For other banks, we extrapolated linearly from the latest profitability statement available to estimate values as of December. This was done for Equity Bank for 2012 whose latest available income statement available was as of November 2012. For 2013, such extrapolation was done for Credit Bank, DTB, Equity Bank, Gulf African Bank and Imperial Bank, whose latest income statement available was as of November 2013, and for Guardian Bank, whose latest income statement available was as of September 2013. 102

Note that the difference between the average lending and deposit rate would not correspond exactly to the NII margin, as the NII margin is based on all interest-bearing assets, and not just loans. This includes assets such as deposits with the CBK, government and government securities. 103

The average deposit rate is a simple average of the local currency interest rates offered on deposits by the top 4 banks 104

Excludes Ecobank. This has been calculated cumulatively for foreign and local currency for all market segments, and excludes interbank transactions.

72


is calculated by us as the ratio of total demand deposits and saving deposits to

total deposits.

187.2. Further, in 2013 the top four banks charged 0.7 per cent more than the other banks

on the average loan. Thus, in comparison to deposits, the higher lending rate is

expected to contribute only marginally in getting high NII margins. Further, although

the top four banks are charging higher interest rates on the average loan, it is not

possible to conclude that this is anti-competitive. The risk profile of their borrowers

would need to be analysed in relation to the other banks, as riskier borrowers justify

a higher lending rate.

188. We now analyse NIR margins. Table 24 below presents the NIR margins. The non-

interest revenue includes service charge fee, commission fee, and other income such as

income from foreign exchange transactions. From the table below, one can observe that

the larger banks are charging more than smaller banks. This is to be expected as they

offer more security of deposits, better convenience and reach (in terms of branch and

ATM network) and lastly purely due to branding. In addition smaller banks are also

considered riskier than the larger banks and thus they would need to charge lower fees

and commissions than larger banks to attract deposits.

Table 24: NIR margin for Kenyan banks in 2012 and 2013

2012 2013

Top 4 banks (A) 5.6% 5.4%


Difference (A – B) 1.9% 1.9%

Source: CBK; Genesis’ Calculations


189. Even though larger banks may be justified in charging higher fees, one needs to establish

if they have a reasonable NIR margin. For this exercise one would need to consider the

individual risk profiles of all the banks and determine the respective risk premiums

associated with the banks. This would allow us to determine if the difference in NIR

margin of larger (more secure) banks and smaller banks is reasonable.

190. Operating cost to income ratio looks at a bank’s operating costs relative to its total

revenue. A lower ratio implies lower cost incurred per unit revenue earned. In principle,

one would expect larger banks to have lower ratios due to economies of scale. However,

larger banks also have a larger infrastructure which gives rise to larger operating costs. It

must also be noted that economies of scale act as a barrier to entry/growth for smaller

firms and thus this ratio is essential in understanding the level of market power in the

market. Table 25 below presents these results.

Table 25: Cost to income ratio for Kenyan banks in 2012 and 2013

2012 2013

Top 4 banks (A) 52.3% 53.3%


Difference (A – B) -3.5% -0.3%



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191. In both the years, the top four banks had lower cost to income ratio than the other banks.

However, the gap narrowed significantly in 2013. Furthermore, in 2013 larger banks also

saw a decline in their costs per branch of KSH 1.2m while smaller banks saw an increase

of KSH 2.3m (after excluding Ecobank).

192. Finally we analyse ROE for the Kenyan banks. Table 26 below shows the results for net

profit margin and ROE in the Kenyan banking sector.

Table 26: Net profit margin and ROE for Kenyan banks in 2012 and 2013

Net profit margin ROE

2012 2013 2012 2013

Top 4 banks (A) 33.3% 32.7% 24.5% 22.3%

Other banks (B) 30.0% 32.8% 17% 18.2%

Difference (A – B) 3.4% -0.1% 7.6% 4.1%



193. It is observed that in 2013 the large banks cumulatively saw a decline in profitability while

the smaller banks saw an increase in profitability through higher profit margins and higher

return to equity. In 2013, small and large banks had similar net profit margins. In fact, all

banks in Kenya made a positive profit in 2013 with the exception of Ecobank. In terms of

ROE, smaller banks experienced lower returns in 2012 and 2013, however, the gap

closed significantly in 2013.

194. Using a DuPont analysis we now decompose ROE into its components to determine the

source of the difference in ROE for the top four banks and other banks. In 2013, the top

four banks and the other banks both had approximately the same net profit margin which

is one of the three drivers of ROE as shown in the table above. Another driver of ROE,

financial leverage, was in fact in lower for the top four banks compared to other banks

(Table 27). However, the top four banks did have higher asset turnover (larger revenues

per unit asset) and this resulted in higher ROE compared to other banks. Higher revenues

per unit asset are consistent with the fact that larger banks have greater NII and NIR

margins, as noted above.

Table 27: Financial leverage and asset turnover for Kenyan banks in 2012 and 2013

Financial leverage Asset turnover

2012 2013 2012 2013

Top 4 banks (A) 6.06 5.74 12% 12%

Other banks (B) 6.92 7.02 8% 8%

Difference (A – B) (0.86) (1.27) 4% 4%



195. The potential reasons for higher revenues per asset, and thus higher ROE, for larger

banks, are as follows:

195.1. Higher CASA ratios. As previously mentioned, the top four banks have higher

CASA ratios thus they have a large source of cheaper funding contributing to

greater NII. The top four banks, on average have 65 per cent of their deposits from

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current or savings accounts, while the corresponding ratio for other banks is only

39 per cent.105

This confirms that a higher CASA ratio is indeed an important factor

for the higher ROE observed for top four Kenyan banks.

195.2. Higher lending rates. The analysis done in section 6 shows that the top four banks

do not consistently have higher lending rates than other banks for all market

segments. Further, since all lending markets are found to be unconcentrated, a

difference in lending rates charged by banks is unlikely to be due to market power.

An analysis of the risk profile of bank obligors can be done for the segments where

the top four banks have higher lending rates to explore this issue further. In any

event, the higher lending rates charged by large banks are unlikely to be

systematically resulting in higher ROE for these banks. To the extent that they do

contribute to higher ROE for any bank, this is not a consequence of lack of

competition.

195.3. Lower deposit rates. The analysis in section 6 also shows that, in general, the large

banks have lower deposit rates than other banks, especially for demand deposits

and savings deposits. The need to further investigate the savings market has

already been noted. One explanation for the observed differential in deposit rates is

the fact that larger banks are likely to be considered safer and customers are more

willing to accept lower deposit rates in return for greater security for their deposits.

For example, the top four banks have lower deposit rates than other banks in the

demand deposits and term deposits markets, even though they are

unconcentrated. Thus, while lower deposit rates can explain the higher ROE for

large Kenyan banks, this is not a result of lack of competition except potentially in

the savings market.

195.4. Higher fee. While we do not have the data to analyse this factor in detail, the higher

NIR margins do show that the top four banks are able to earn greater fee revenue

compared to other banks. This could be because of high fee rates due to

perception about greater safety of funds in large banks vis-à-vis the smaller banks,

and quality of service. However, this issue needs to be further investigated as

higher fee for large banks could also result from inadequate competition.

196. The above analysis shows that the factors that appear to be driving the profitability of

large banks are higher CASA ratio, and the fact that they are perceived to be safer than

smaller banks by depositors. However, further analysis of the savings deposits market

and the fees charged by banks needs to be done to determine if lack of competition could

also be responsible for high profitability. Note that while our analysis of profitability is done

at an overall level, an analysis of profitability at market segment level (i.e. corporate,

SME, personal) would have further shed light on the segments that are more profitable

than others. However, this analysis is dependent upon the banks’ ability to allocate costs

by segments. Further since a large part of these costs are likely to be common, any

allocation of these into particular segments may be arbitrary.

197. Based on the preceding analysis one is able to make several observations with regards to

the Kenyan banking sector profitability and identify areas for further analysis. Table 28

below summarises the main findings and next steps to assess profitability at a more

granular level

105

For December 2013.

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Table 28: Profitability summary

Ratio Is the ratio more

favourable for top 4 banks

Possible reasons Areas for further analysis

NII margin Yes Mainly coming from larger banks having lower average deposit rates. This is due to them having a higher CASA ratio. Also, the large banks have marginally higher average lending rates.

An assessment of the risk profile of the bank obligors and the risk profile of the individual banks is recommended to determine if the rates charged by banks’ are justified by the risk. An analysis of the savings market is recommended

NIR margin Yes Larger banks are less risky than smaller banks, offer better services and offer more reach (ATM and branch)

Individual bank infrastructure costs, service levels and risk profiles should be assessed to determine a reasonable NIR margin that can be charged

Cost to income No106

Net profit margin No Profitability analysis by segment would help understand if larger banks were earning supernormal profits in some segments of the market

Return on equity Yes Larger banks earn higher revenues thus allowing them to experience higher ROE. This appears to be a function of the fact that the larger banks have high NII and NIR margins.

A revenue, cost and profitability analysis at a segment (corporate, SME, personal) level for each bank is recommended


7.2. INTERNATIONAL COMPARISON

198. We now employ another standard method of assessing profitability which has been used

in several market inquiries. A common methodology used to analyse profitability in

general is the return on capital employed (ROCE). This is a ratio of the operating profits of

the firm with its capital employed, which consists of equity and long-term debt. The ROCE

is then compared with the weighted average cost of capital (WACC), which is calculated

by considering the cost of equity as well as cost of debt. WACC represents the return that

the firm needs to make to adequately reward its investors. However, in the banking

industry, since a majority of debt would come from its customers and not investors, a

standard measure of profits for the banking industry is the ROE, which is the ratio of

income with the total equity of the bank. This can be compared to the banks’ cost of

equity. For example, the UK CC in its market inquiry into the SME sector computed the

return on equity for each bank. The ROE was compared to a benchmark of the cost of

equity by the UK CC. It was found that the largest four banks were making excess profits

of £726 million per year on average.107

106

Note that the cost to income ratio for top 4 banks is only marginally lower than the other banks. 107

UK CC market inquiry into the SME segment. 2002.

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199. We calculate the ROE of various banking sectors around the world and compare it to the

average cost of equity which we calculate. The difference between the ROE and cost of

equity is referred to as excess returns. A banking sector is considered to be more

profitable the larger its positive excess returns are.

200. As per most recent World Bank data (2011 data available as of November 2013), the

ROE for Kenya was 23.1 per cent. Data for other countries shows that ROE of the

banking sector ranged from -54.4 per cent for Cyprus to 39.9 per cent for Botswana. In

terms of relative positions, Kenya had the 27th highest ROE in 2011. If one only looked at

countries in Sub-Saharan Africa, Nigeria had the lowest ROE at 0.9 per cent, while

Botswana had the highest ROE at 39.9 per cent. The average was 19.8 per cent for all

these countries taken together. In terms of relative ranking, Kenya had the 13th highest

ROE (of 40 countries in the Sub-Saharan region) in 2011.

201. When one considers excess returns, which is defined as ROE minus the cost of equity,108

we note that Kenya’s banking sector ranks 23rd

out of a sample of 117 countries, earning

excess returns of 6 per cent. The ROE taken is the average for 2007-11 and the countries

considered in this sample had available data for all five years. The figure below shows

this sample of countries ranked by their excess returns. One can note that this would

place Kenya somewhere in between Ghana and Uganda. Considering Kenya’s GDP and

income level this ranking does not seem abnormal.

Figure 34: Excess returns for 117 countries

Source: World Bank data 2013; Genesis calculations

108

The methodology used to calculate the cost of equity is shown in Appendix H.

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8. CONCLUSIONS AND PHASE 2 TASKS

202. A competition market inquiry seeks to determine whether concentration in a market (and

the relevant sub-markets) creates conditions in which market participants can use market

power to increase prices to consumers. As such it does not seek to directly answer the

question as to whether consumers pay too much for their services, only whether there is a

possibility that consumers are paying too much as a result of the market power arising

from a concentrated market or a market in which barriers to entry allow incumbents to

exert market power, such that regulators should intervene.

203. This market inquiry for the Kenya banking industry has analysed the industry from three

key perspectives (i) concentration in the market which reflects the competitive constraint

placed by the existing players in the market on each other (ii) barriers to entry and

expansion that reflect competitive constraints from potential entrants into the market and

(iii) customer buyer power that reflects constraints imposed on banks due to the

bargaining power of their customers. With 43 banks, at an overall level customers in

Kenya have many options to choose from for their banking needs. The HHI for the

industry as a whole, on the lending or deposit side, is low indicating that no individual

bank or small group of banks has a large market share to exert market power. However,

one needs to examine the concentration at the level of each product market to fully

understand competition in this industry. We have considered customer segments -

corporate, SME and personal - as markets for our competition analysis and further

examined product markets within each segment. The concentration analysis shows that

all product markets except corporate savings, SME savings and personal savings are

unconcentrated.

204. A review of the regulatory requirements for Kenyan banks indicates these requirements

are not very different from the requirement in comparable countries and generally cannot

be considered to be onerous. There may be barriers to entry that arise due to barriers to

expansion – there are large economies of scale in the industry which make it difficult for

small banks to compete effectively with the big banks. Establishing a branch network can

be a costly and time consuming process and can, therefore, act as a barrier for a bank to

expand its business, particularly in the SME and retail segment where potential customers

may be in small towns and rural areas. Branding also creates an advantage for the big

banks. However these issues are no different from those faced by the banking industry in

other countries. More importantly, the Kenyan financial services sector is well known for

its growth and dynamism. The fact of new players entering the Kenyan banking industry,

in particular the entry and rapid growth of Equity Bank from a building society to one of

the largest banks strongly indicates that these barriers may not be insurmountable. In

addition, some banks may be relatively small, in terms of deposits and lending, due to

their own strategic choices and may choose to target a specific niche market. Further, as

in other countries, countervailing buyer power only exists in the corporate segment.

205. An examination of the market for three lending products that cut across segments –

mortgage lending, credit cards and consumer durables – shows that credit card lending

and consumer durable lending are concentrated. However, no particular barriers to entry

have been found for these markets. It is also to be noted that these markets form a small

proportion of total lending. The geographic market concentration analysis points to most

counties being highly concentrated but the vast majority of lending and deposits are in

urban areas where many banking options are available

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206. For the products where the market structure is competitive, lack of competition cannot be

considered a reason for too low deposit rates or too high lending rates. Of the three

markets where the concentration is high, for corporate savings we do not observe the four

largest banks paying an average deposit rate lower than that paid by other banks. This is

not surprising given that corporate customers are financially savvy and are able to

effectively negotiate with the banks thus negating any market power the banks may have

because of high market share. For SME and personal savings, which are highly

concentrated, an alternate explanation for the observed low deposit rates paid by big

banks is the fact the customers are willing to take a low rate because the large banks are

safe banks and less likely to fail.

207. Finally, an assessment of industry wide profitability indicates that the industry has

profitability similar to that observed in comparable countries. While larger banks in Kenya

do have a higher return on equity, this is likely coming from their lower cost of funding

(larger CASA ratio) and not because interest rates for large banks within a market

segment are different from those for other banks.

208. While this study has enabled us to draw broad conclusions on competition in the Kenyan

banking industry, some issues remain unresolved which will be addressed in Phase 2 of

the market inquiry.

209. To begin with, fees charged by banks have not been considered in our assessment. In

most countries fee income can amount to up-to a third of the income banks receive, and

conversely a third (or more for some consumers) of the cost of banking. The debate

regarding the Kenyan banking industry has also noted high fees being charged by

Kenyan banks, in particular the large banks. Understanding the range of fees and manner

in which fees are determined within the banking industry has been the focus of a number

of market inquiries across the world and will be applied to the Kenyan market.

210. Whereas Kenya is a market leader in mobile payment services, the Mpesa service

constitutes a specific category of payment service/deposit product with a very high

concentration/market share. The determination of fees within the Mpesa service and

between Mpesa and other payment services will need to be specifically investigated.

211. Phase 2 will include the examination of certain categories of lending that were excluded

from the initial analysis – in particular vehicle and asset finance

212. Further analysis of the savings deposit market: Since our analysis has indicated high

concentration in saving deposits, along with potential barriers to entry and expansion, one

needs to examine this segment in more detail. Reasons for high concentration in this

market should be understand, particularly in light of the fact that the other two deposit

markets – demand and term deposits – are not concentrated. As personal savings form a

large part of personal deposits, and this is a segment directly affecting many consumers,

Phase 2 of this inquiry will examine this segment in more detail:

212.1. Concentration: In particular whether the apparent concentration is material or as a

result of the way in which different banks have classified their products in their

regulatory returns, or specific customer choices – namely the distribution of

Government accounts

212.2. Entry/Expansion barriers: Particular barriers faced by small banks in increasing

their market share in the saving deposits market will be explored:

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212.2.1. Lack of interoperable payment systems of banks. Understanding the

current situation in terms of interoperability of the banking systems and the

interbank ATM fee, and whether this results in a disadvantage for small

banks.

212.2.2. Network of branches and ATMs as an entry barrier. Examining how the

saving deposit account holders are distributed across large cities, small

cities and rural areas.

212.2.3. Brand as an entry barrier. Since we also observe that saving rates in the

data are typically higher for small banks, we will explore the premium

interest small banks have to pay to the depositors in order to attract saving

deposits

212.2.4. Switching costs. Examining the existence and extent of switching costs in

terms of financial and non-financial costs in the savings deposit market.

Factors that would increase the likelihood of customer switching will be

identified.

212.3. Interest rates: A detailed analysis of prevailing saving deposit rates to determine if

they are at the competitive level can be done. Further an analysis that separates

the impact of lack of competition in the market from the impact of consumers’ need

to have deposits in a large and safe bank can be done in Phase 2. This would

require information on banks’ credit ratings. Interviews with banks will also help us

identify drivers that influence deposit rates in general.

213. In general, removing constraints on consumers in terms of switching bank accounts can

enhance competition in the market. Phase 2 study will consider whether, for example, a

ban on early loan repayment penalty can increase competition without having a significant

negative impact on the banking industry.

214. As noted earlier, our analysis of interest rate spreads only considers tenor and market

segments but does not incorporate differences in credit risk across bank customers or

bank heterogeneity in terms of differences in the likelihood of a bank failing. Examining

lending and deposit spreads after incorporating information on credit ratings of a bank’s

borrowers and the financial strength/credit rating of the bank will address the question of

whether spreads are driven by the underlying credit risk and maturity or by market power.

This would also involve examining the banks’ strategy. Banks may strategically focus on

particular product segments, for example, Housing Finance and KCB may focus on

mortgage lending, or banks may focus on a lower income segment. This focus may

explain the observed concentration results and trends in interest rates.

215. The concentration analysis in this report has relied on lending and deposit data for market

segments and products as defined by each bank. Since these definitions are likely to vary

across banks, detailed data on lending and deposits can be used to address this issue.

Detailed data can be used to objectively define segments and products in the same way

for all banks.

216. Finally, given the available data our report has analysed overall bank profitability even as

we acknowledge the presence of distinct market segments. Analysing profitability by the

markets considered for the concentration and the spread analysis can help correlate

market power, where it exists, to profitability in that segment.

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217. Table 29 gives a summary of the phase 2 tasks outlined in this study.

Table 29: Summary of Phase 2 tasks

Task Description

Analysis of the fees charged by banks

An analysis of the range of fees and the manner in which fees is determined in the Kenyan banking industry

Investigation of m-pesa fees Since m-pesa has a very high share, the fees charged for transactions between m-pesa and other payment services is an important constituent for ensuring a competitive market.

Analysis of the vehicle asset finance market

An analysis of the market structure of the vehicle asset finance market

Analysis of the saving deposit market

Competitive analysis of the savings deposit market to ensure that there are no competition concerns

Segment analysis of profitability Analysis of bank profitability by market segment. However this analysis will be dependent upon bank’s ability to allocate cost by segment

Validation of the concentration results in Phase 1 study

Validation of the concentration results in Phase 1 using data from banks that reflect a consistent definition of lending and deposit market segments.

Analysis of the interest rate spread

Analysis of the credit risk of customers and banks to assess interest rate spread

Assessment of ban on penalty for early repayment of loan

Analysis to consider if a ban on early repayment penalty is justified

Identifying consumer protection concerns

While this is a market inquiry that examines how market conditions can impact consumers, relevant guidelines in Kenya and other countries can be reviewed to identify ways of strengthening consumer protection using measures within the ambit of the CAK.

Further analysis of MFB’s Consideration of the importance of MFB’s in each saving and deposit product

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9. POLICY RECOMMENDATIONS

218. We find that the Kenyan banking industry is generally competitive. As the industry has a

competitive market structure, the widely held concern that high lending rates and high

interest spread are as a result of the market power of dominant banks has not been

substantiated by this study and is probably misplaced. The regulation of lending rates, or

interest rate spread is thus not justified by competitive concerns or the market structure.

Our analysis of interest rate spreads also does not reveal any evidence of anti-

competitive interest rates that would warrant such an intervention.

219. The guiding principle for regulation is that the remedy for harmful conduct should be the

least restrictive to achieve the intended objective and should be proportionate to the

extent of risk, and should also consider the potential harmful effects of any regulation. Any

unwarranted regulation of rates or spreads may adversely affect the incentives for new

players to enter the market or existing players to expand.

220. The results of Phase 2 results may nonetheless suggest areas in which specific

regulatory interventions are justified, but further analysis is required. In particular creating

a greater degree of inter-operability within the payment system and ensuring that the

prices at which the customers of smaller banks access the payments system are not

disadvantageous can promote competition.

221. Another important measure is to ensure the depth and quality of public information on

borrowers through the credit bureaus so that banks can compete more effectively for

customers. This is already being implemented, and commercial as well as microfinance

banks have been sharing positive and negative information with credit bureaus since

March 2014.

222. While there are a large number of banks in the Kenyan banking industry, the data shows

that several of these banks are very small. These banks may lack resources to compete

with large banks, particularly in markets where barriers to expansion may exist in the form

of high cost of network, branding, etc. The fact that smaller banks are less profitable may

mean that they struggle to make the investments necessary to compete and will continue

to lose market share. Increasing capital requirements to reduce the number of banks is

thus sometimes hypothesised as a way of increase effective competition within the sector,

but needs to be approached with extreme caution as rapid consolidation can result in

some very unhappy and unsustainable mergers as occurred in Nigeria. It is to be noted

that the CBK is already considering such a move.109

223. Finally, another intervention which enhances competition is reduction in the difficulty

faced by consumers in switching bank accounts. Establishing an appropriate code of

conduct to ensure that the bank which is losing a customer, and associated credit or

deposit facilities, acts with appropriate speed and diligence, and potentially outlawing

early repayment penalty fees are appropriate regulatory interventions. However, further

field research to confirm current practices is needed before any such intervention.

224. Table 30 gives a summary of the policy recommendations given in this study based on

phase 1 analysis.

109

http://www.nation.co.ke/business/Bankers-want-core-capital-up-to-Sh9bn/-/996/2411982/-/6acym8z/-/index.html

http://www.nation.co.ke/business/Bankers-want-core-capital-up-to-Sh9bn/-/996/2411982/-/6acym8z/-/index.html

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Table 30: Summary of Policy Recommendations

Policy Recommendation Further Steps Stakeholder(s)

Greater degree of interoperability between payment systems

Phase 2 study examining the current situation on interoperability and whether it is a constraint for small banks in attracting savings deposits. Cost-benefit analysis of a move towards greater interoperability; Resolving issues such as fixing the interoperability fee.

Competition Authority of Kenya, Central Bank of Kenya, and Kenyan Bankers Association

Increasing capital requirements for banking licenses

Cost-benefit analysis of the move

Central Bank of Kenya

Ensuring greater customer switching by banning early repayment penalty

Evaluation of the effects of repayment penalty in terms of switching cost and efficiencies (in terms of asset-liability mismatch)

Competition Authority of Kenya, Central Bank of Kenya

Code of conduct to ensure that banks act with appropriate speed and diligence to close their customers’ accounts where requested

Kenyan Bankers Association

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APPENDICES

APPENDIX A: REGULATORY ENVIRONMENT AND CHANGES

1. The Central Bank of Kenya (CBK) is the regulator of the banking industry in Kenya. The

commercial banks have an industry association, Kenya Bankers Association (KBA), which

works as a forum to address issues affecting the banking sector. Similarly, the micro-

finance institutions are organized under the Association of Micro-Finance Institutions

(AMFI) which addresses concerns of micro-finance institutions.

2. The CBK is responsible for formulating and implementing monetary policy and fostering

the liquidity, solvency and proper functioning of the financial system. It was established in

1966 through the Central Bank Act as a result of the desire of three East African states to

have independent monetary and fiscal policies.110

3. Following the announcement of the new constitution on 27 August 2010, the CBK was

established under Article 231 of the Constitution (2010). Under this Article, the Central

Bank of Kenya has the responsibility of formulating monetary policy, promoting price

stability, issuing currency and performing any other functions conferred on it by an Act of

Parliament.

4. Sections 4 and 4A of the Central Bank of Kenya Act set out the Bank’s objectives which

include: (i) to formulate and implement monetary policy, (ii) to foster the liquidity, solvency

and proper functioning of a stable market-based financial system, (iii) to support the

economic policies of the Government including its objectives for growth and employment,

(iv) to formulate and implement foreign exchange policy, (v) to hold and manage its

foreign exchange reserves and to license and supervise authorised foreign exchange

dealers, (vi) to issue currency notes and coins, and (vii) to formulate and implement such

policies that best promote the establishment, regulation and supervision of efficient and

effective payment, clearing and settlement systems, amongst others.

5. In order to achieve these objectives, various regulations and guidelines have been issued

by the Central Bank of Kenya that intend to111

:

5.1. Reduce the level of risk to which bank creditors are exposed

5.2. Reduce the risk of disruption resulting from adverse trading conditions for banks

causing multiple or major bank failures

5.3. Reduce the risk of banks being used for criminal purposes

5.4. Protect banking confidentiality credit allocation

6. The CBK follows a Risk Based Supervisory (RBS) framework, which is intended to allow

the CBK to “deliver consistent, high-quality supervision as the financial sector develops

and as risk profiles of institutions change in reaction to competitive forces.” The approach

enables the CBK to focus its regulatory attention on high risk areas.

110

Central Bank Website (2014) About us, Accessed 3 March 2014 111

Central Bank Website (2014) About us, Accessed 4 March 2014

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7. In addition, the CBK has published Prudential Guidelines that implement various

regulations and guidelines for the banking sector. These were updated in 2000, 2006, and

recently in 2013. These typically cover bank license requirements, capital requirements,

liquidity measures and requirements, foreign exchange limits, and prohibited business.

The most recent regulations issued by the CBK are the Prudential Guidelines of 2013

which are intended to make the banking system of Kenya stronger and more transparent.

Key banking legislation and regulations

8. The banking industry in Kenya is primarily governed by the Banking Act, the Central Bank

of Kenya Act and the various prudential guidelines issued by the CBK.112

In addition, the

Microfinance Act, The National Payment System Act and the Kenya Deposit Insurance

Act also regulate the activities of the industry players.

Prudential Guidelines

9. The Prudential Guidelines are an important instrument for the CBK to regulate the

banking industry. The Prudential Guidelines of 2013 include, but are not limited to, the

following:

9.1. Entry requirements. Entry into the banking sector is regulated by the CBK, which is

the sole authority responsible for issuing banking licences, as well as licenses for

MFBs. The regulation is intended to provide guidance and information to those

applicants seeking to secure a license to conduct the business of a bank, financial

institution or mortgage finance company in Kenya in compliance with Sections 3, 4

and 5 of the Banking Act.

9.2. Ownership. The guidelines limit the holding of any one shareholder:

To diversify ownership of an institution for the purpose of prudent

management; direct or indirect share-holding of an institution has been

restricted to a maximum of 25% to any one person other than:

a) another institution,

b) the government of Kenya, or the Government of a foreign

sovereign state,

c) a state corporation within the meaning of the State Corporations

Act, or,

d) a foreign company, which is licensed to carry on the business of

an institution in its country of incorporation

9.3. Capital. Section 18 of the Banking Act empowers the Central Bank of Kenya to

prescribe the minimum capital requirements in terms of the core capital, the core

capital to total capital ratio etc. to be maintained by institutions. The requirements

laid down in the guideline attempt to ensure that each institution maintains a level

of capital that is sufficient to protect its depositors and creditors, as well as

commensurate with the risk associated with activities and profile of the institution.

112

The Companies Act is also applicable to the banks for the purpose of registration of banks as a business.

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The minimum capital requirements in terms of the core capital has increased in

2008 Prudential Guidelines with effect from 31 December 2012 from the previous

Prudential Guidelines issued in 2000 and 2006, where capital requirements did not

have a conservation buffer, and minimum core capital was set at 250m Ksh and is

now at 1b Ksh.

Table 31: Minimum capital requirements as defined in the Prudential Guidelines, 2013113

Core Capital (Tier 1) to Risk-weighted Assets (RWA)

Total Capital to Risk-weighted Assets (RWA)

Minimum Ratio 8% 12%

Conservation Buffer 2.5% 2.5%

Minimum plus Conservation Buffer

10.5% 14.5%

Minimum absolute core capital

Banks and Mortgage finance companies

Kshs 1bn

Financial Institutions Kshs 200m

Source: Central Bank of Kenya Prudential Guidelines, 2013

9.4. Liquidity. The purpose of the liquidity guidelines is to, among other things, ensure

each institution maintains adequate level of liquidity in order to meet its obligations

and help institutions in the formulation of liquidity management strategies and

procedures.114 Currently an institution is required to maintain a minimum of twenty

per cent of all its deposit liabilities in liquid assets. Additionally an institution is

required to put mechanisms in place that will alert to potential funding problems.115

9.5. Activities. The guidelines set out specific requirements, including single borrower

limits, restrictions on facilities to insiders (staff and directors), restrictions on large

exposures, and restrictions on trading and investments.

9.6. Bank governance. The regulations cover (i) corporate governance principles, (ii)

code of conduct, (iii) remedial measures and administrative sanctions, (iv) guidance

on Board and individual director’s performance evaluation, and (v) guidance on

holding Board meetings through Video Conferencing. These are intended to

provide the minimum standards required from shareholders, directors, chief

executive officers, management and employees of an institution so as to promote

proper standards of conduct and sound banking practices, as well as ensure that

they exercise their duties and responsibilities with clarity, assurance and

effectiveness.116

9.7. Anti-Money Laundering (AML). The purpose of the AML section is to provide

guidance regarding the prevention, detection and the control of possible money

laundering activities and terrorism financing and applies to all institutions licensed

113

Risk weighted assets are a measure of banks assets adjusted for risk. Thus a $1m loan to a high risk borrower may have the same RWA as a $10m loan to a low risk borrower. Tier 1 capital is Core Capital – primarily consisting of common equity and disclosed reserves. Tier 2 capital is supplementary capital will be applied when the institution becomes a “Gone” concern 114

CBK Prudential Guidelines 2013, pg 157 115

The guidelines set out the minimum liquidity management that should be in place, including Liquidity Management Strategy, Structure & Information Systems, Measuring and monitoring, Contingency Funding Plans, and stress testing activities. 116

CBK Prudential Guidelines 2013, section 2.1 pg 37

86


under the Banking Act. The 2013 updates reflect a significant increase in

stringency in AML requirements.

10. The 2013 Prudential Guidelines include increased consumer protection reforms, which

are intended to provide a clear framework for protecting customers against risks of fraud,

loss of privacy and unfair practices, and require full disclosure of information regarding

products and services offered to customers. Specifically, the new Prudential Guidelines

require certain disclosures when a customer applies for a loan, or makes an interest-

bearing deposit:

• Inform the consumer of the term of the fixed deposit or loan;

• Inform the consumer of the charges, if any, for, and consequences of,

prematurely terminating a fixed deposit or loan;

• Inform the consumer of whether the interest is fixed or variable;

• Give a consumer information on the applicable interest rates for the contracted

period and the basis and frequency on which interest payments or deductions are

to be made;

• Explain the method used to calculate interest rates;

• Disclose prominently the total amount of income the consumer shall receive on

the fixed rate deposits of the consumer;

• Provide a repayment schedule over the term of the loan indicating periodic

principal repayments and interest charged; and

• Disclose the total cost of credit.

11. By increasing the transparency of the costs of credit and interest rates, quality of

competition may increase because consumers are able to make an informed choice

around products.

12. Thus the 2013 updates to the Prudential Guidelines stipulate higher capital requirements,

greater consumer protection and transparency, as well as more stringent Anti-Money

Laundering requirements. The key changes to the regulations include (i) an enhancement

of the capital adequacy requirement, (ii) an enhancement of Corporate Governance

requirements, (iii) significant reforms for consumer protection, as well as guidelines on

stress testing, outsourcing, prompt corrective action and voluntary liquidation, as shown in

the figure below.

Microfinance regulations

13. In Kenya, microfinance institutions were historically considered to be providers of credit to

micro business and individuals and were not allowed to take deposits. However, the

Microfinance Act of 2006, that became operational in May 2008, effectively allowed

Microfinance institutions to apply for a license for becoming a microfinance bank (MFB)

that is allowed to accept deposits. As a result microfinance institutions are now in a

position to meet a broader set of needs of their customers.

14. Following this measure, several microfinance banks have entered the market. Currently in

Kenya there are 9 MFBs, as shown in the table below. The latest license was given to U&I

87


Deposit Taking Microfinance Institution Ltd. in May 2013.117

This move is expected to

increase competition in the banking industry, particularly for the low-income customers.

Table 32: List of licensed MFBs in Kenya

S. No. Name of the MFB

1 Faulu Kenya

2 Kenya Women Finance Trust

3 SMEP

4 Remu

5 Rafiki

6 UWEZO

7 Century

8 SUMAC

9 U&I

Source: Central Bank of Kenya, 2014

15. The principal objective of the Microfinance Act, which governs the MFBs, is to regulate

the establishment, business and operations of microfinance institutions. The Act enables

the MFBs to “mobilise savings from the general public, thus promoting competition,

efficiency and access”.118

It is ultimately expected that the microfinance industry will play a

crucial role in deepening financial markets and enhancing access to financial services in

Kenya. The decision to allow select microfinance institutions to take deposits reflects the

evolution of government policies on this front.

16. The key regulations for the MFBs are summarised in the table below:

Table 33: Microfinance regulations - key requirements

Regulations

Banking licence issuing agency CBK

Application fee Ksh5,000

Licence fee Ksh 150 000 (National)

Branch opening

*City council - Ksh 50 000

*Town council - Ksh 20 000

*County council - Ksh 10 000

Minimum capital requirements 20m for community–based MFBs and 60m Ksh for nationwide MFBs

Minimum risk-based regulatory capital ratio Not available

Supplementary Capital (Tier 2) Should not exceed core capital

Capital conservation Buffer Not available

117

Central Bank of Kenya 118

Central Bank of Kenya website https://www.centralbank.go.ke/index.php/microfinance-institutions

88


Regulations

Minimum Core Capital (Tier 1) of total risk adjusted assets plus risk adjusted off balance sheet items

10%

Minimum Core Capital (Tier 1) of total deposit liabilities

8%

Minimum Total Capital of total risk adjusted assets plus risk adjusted off balance sheet items

12%

Minimum liquidity requirement 20% deposit liabilities in liquid assets

Single borrower limit

shall not extend loans or credit facilities 5% of core capital

grant a microfinance loan to any single end user or his associate that exceed 2% of its core capital

aggregate amount of microfinance loans is equivalent to or more than 70% of the institution’s total loan portfolio

No advances or credit to shareholders and directors unless approved by Board, made in the normal course of business and on similar terms to ordinary customers

Large exposures (10% of core capital)

Large exposure defined as exceeding 2% and not more than 5% of core capital - such facility may not exceed 30% of institutions core capital

Source: Deposit taking microfinance regulations, 2008

17. Most notably, the difference in the requirements for MFBs and commercial banks is in the

capital requirement. Microfinance banks are only required to hold 20m or 60m (depending

on whether it is a community-based or a nationwide bank), while commercial banks are

required to hold 1bn KES. This difference would have significant implications if

microfinance banks were able to offer credit and lending products to the same class of

customers as commercial banks. However the core of their business remains ‘micro-

focused’ because they are only allowed to lend up to 30% of core capital to large

exposures (those that exceed 2% of core capital and not more than 5% of core capital).

This limits the ability of microfinance providers to compete effectively for loans and

advances in high salary and corporate segments. Note that there is no regulatory

restriction on the MFBs to lend to any customer.

Other regulations

Credit reference bureaus

89


18. The CBK launched a credit information sharing mechanism between banks in 2010 to

ensure that banks get access to credit histories of potential borrowers from other

banks.119

This has led to more efficient evaluation by banks of credit-worthiness of its

customers and thus allows them to charge an interest rate that is more aligned with the

possible risk in lending to a given customer. While previously, the mechanism allowed for

sharing only the negative history (i.e., where a customer may have defaulted on loans),

now the CBK has allowed for sharing of positive history also. This is likely to result in

better pricing for customers that have a good credit history and may lead to lower average

interest rates. Only two bureaus have been licensed to date including, Credit Reference

Bureau Africa Limited and Metropol Credit Reference Bureau Limited.

Deposit Insurance

19. A key addition to the Kenyan banking regulatory landscape has been the introduction of

deposit insurance regulations. Deposit insurance exists because banking

institution failures have the potential to trigger a broad spectrum of negative outcomes,

including economic recessions. A deposit insurance regulation clarifies the authority’s

obligations to depositors and can provide countries with an orderly process for dealing

with bank failures and a mechanism for banks to fund the cost of failures. Since deposit

insurance regulations promote deposit protection, instill public confidence, and foster

financial stability, they allow for smaller banks to compete more effectively with large

banks.

20. In Kenya, the Kenya Deposit Insurance Corporation (KDIC) provides for a deposit

insurance scheme for customers of member institutions, and includes: administering the

deposit insurance scheme; collecting contributions for the Fund from member institutions;

and holding, managing, and applying the Fund

21. The Kenyan deposit insurance regulation covers (i) current accounts, (ii) saving accounts,

(iii) call deposits, (iv) fixed/term deposits and (v) foreign currency deposits. The

contributions required by institutions are calculated as.120

21.1. A percentage, as directed by the KDIC from time to time, but not less than 0.15% of

the average of its total deposit liabilities during the previous twelve months

21.2. In addition to the flat rate contribution, institutions shall also contribute a flat

percentage rate of their total deposit liabilities during the previous twelve months

based on the risk-adjusted contribution methodology – which is outlined in the

regulations

22. Every banking institution is required to provide monthly information to KDIC on total

deposit liabilities, total number of depositors, total insured deposits, number of depositors

fully covered total deposits with corresponding loans and debts immediately due and

payable.

23. Consolidated supervision & Supervisory colleges have been introduced in Kenya.

Consolidated supervision is a comprehensive approach to banking supervision which

119

DEVELOPMENTS IN THE KENYAN BANKING SECTOR FOR THE QUARTER ENDED 30th JUNE 2013. CBK. 120

Kenya Deposit Insurance Act, 2012 Draft Regulations.

90


endeavours to evaluate the strength on an entire banking group taking into account all the

risks which may affect a bank.

24. Anti-Money Laundering: 2012 also saw the strengthening of the country’s Anti-Money

Laundering and Combating the Financing of Terrorism legal and regulatory framework. In

April 2012, the Anti-Money Laundering Advisory Board approved the operationalization of

the Financial Reporting Centre

91


APPENDIX B: LENDING AND DEPOSIT BY BANK AS OF DECEMBER 2013

Table 34: Lending and deposit by market segment

Bank Corporate Segment SME Segment Personal Segment

Lending %

share Deposit

% share

Lending %

share Deposit

% share

Lending %

share Deposit

% share

African Banking Corporation Ltd - - - - - - - - - - - -

Bank of Africa (K) Ltd 19,250,609 2.7% 18,786,951 3% 8,264,728 2.7% 7,068,450 1.8% 3,855,128 0.8% 10,797,205 2.0%

Bank of Baroda (K) Ltd 16,093,441 2.3% 1,867,060 0% 5,824,153 1.9% 31,336,877 7.9% 2,150,078 0.4% 7,862,363 1.5%

Bank of India - - - - - - - - - - - -

Barclays Bank of Kenya Ltd 52,534,927 7.4% 53,216,442 7% 2,852,294 0.9% 63,630,884 16.0% 66,267,569 13.6% 42,929,524 8.0%

CFC Stanbic Bank (K) Ltd 36,455,624 5.1% 78,415,505 11% 12,164,509 4.0% 16,074,836 4.0% 22,682,091 4.7% 16,690,860 3.1%

Chase Bank Ltd 17,174,811 2.4% 14,208,634 2% 6,323,028 2.1% 8,271,292 2.1% 6,089,678 1.3% 13,857,832 2.6%

Citibank N.A. Kenya 25,213,008 3.6% 43,835,440 6% - - - - - - - 0.0%

Commercial Bank of Africa Ltd 28,415,342 4.0% 43,409,212 6% 12,014,411 4.0% 22,468,920 5.6% 18,524,485 3.8% 24,435,219 4.6%

Consolidated Bank of Kenya Ltd 4,660,895 0.7% 3,775,504 1% 3,608,113 1.2% 4,529,461 1.1% 3,608,954 0.7% 3,717,571 0.7%

Co-operative Bank of Kenya Ltd 63,752,643 9.0% 86,088,636 12% 29,029,386 9.6% 43,966,628 11.0% 52,843,829 10.9% 44,720,961 8.3%

Credit Bank Ltd 2,656,120 0.4% 2,265,832 0% 1,498,573 0.5% 843,952 0.2% 411,580 0.1% 2,557,390 0.5%

Development Bank of Kenya Ltd 4,082,848 0.6% 9,254,618 1% - - - - 3,317,112 0.7% 1,271,977 0.2%

Diamond Trust Bank (K) Ltd 13,894,771 2.0% 6,599,240 1% 55,606,004 18.3% 32,894,178 8.3% 4,088,525 0.8% 33,549,264 6.3%

Dubai Bank Ltd - - - - 2,754,758 0.9% - - 167,335 0.0% - -

Ecobank Kenya Ltd 5,050,694 0.7% 5,658,319 1% 7,070,972 2.3% 7,921,643 2.0% 8,081,110 1.7% 11,661,781 2.2%

Equatorial Commercial Bank Ltd - - - - - - - - - - - -

Equity Bank Ltd 54,142,099 7.6% 12,025,692 2% 59,343,833 19.5% 43,406,180 10.9% 44,771,061 9.2%

103,250,079 19.2%

Family Bank Ltd - - 527,405 0% 3,298,344 1.1% 5,838,749 1.5% 25,936,758 5.3% 28,230,833 5.3%

92



Fidelity Commercial Bank Ltd 2,219,119 0.3% - - 3,409,002 1.1% 10,871,331 2.7% 988,389 0.2% 645,605 0.1%

First Community Bank Ltd - - - - - - - - - - - -

Giro Bank Ltd 4,704,770 0.7% 1,868,204 0% 1,760,218 0.6% 9,402,991 2.4% - - - 0.0%

Guaranty Trust Bank Ltd 8,974,125 1.3% 7,043,655 1% 1,328,217 0.4% 855,043 0.2% 461,068 0.1% 10,548,674 2.0%

Guardian Bank Ltd 8,252,012 1.2% 4,499,116 1% - - 543,885 0.1% 759,671 0.2% 6,137,982 1.1%

Gulf African Bank Ltd 7,995,993 1.1% 1,693,061 0% 1,704,815 0.6% 627,418 0.2% 1,178,352 0.2% 10,271,074 1.9%

Habib Bank Ltd - - - - 3,313,576 1.1% 2,734,408 0.7% 212,909 0.0% 2,817,690 0.5%

Habib Bank A.G. Zurich 1,906,477 0.3% 2,486,247 0% 615,465 0.2% 1,207,703 0.3% 184,277 0.0% 4,623,268 0.9%

Housing Finance Co. of Kenya Ltd

12,578,070 1.8% 17,050,035 2% - - - - 23,584,051 4.9% 9,450,760 1.8%

I&M Bank Ltd 35,881,474 5.1% 6,390,658 1% 26,281,065 8.6% 22,256,356 5.6% 12,924,390 2.7% 46,199,251 8.6%

Imperial Bank Ltd 17,573,275 2.5% - - 6,030,482 2.0% - 0.0% 3,556,575 0.7% - 0.0%

Jamii Bora Bank Ltd 1,468,664 0.2% 855,009 0% 158,670 0.1% 1,026,010 0.3% 2,379,671 0.5% 1,539,015 0.3%

Kenya Commercial Bank Ltd 91,913,161 13.0%

186,305,584 26% 17,056,016 5.6% 41,000,763 10.3% 95,782,904 19.7% 9,906,434 1.9%

K-Rep Bank Ltd 597,520 0.1% 971,325 0% 5,432,094 1.8% 1,625,049 0.4% 3,451,829 0.7% 6,545,872 1.2%

Middle East Bank (K) Ltd 3,627,349 0.5% 1,300,909 0% - - 489,923 0.1% 213,631 0.0% 1,810,253 0.3%

National Bank of Kenya Ltd 6,084,732 0.9% 13,024,384 2% 10,673,531 3.5% 6,274,407 1.6% 23,850,745 4.9% 14,306,245 2.7%

NIC Bank Ltd 70,357,618 9.9% 56,377,861 8% 418,600 0.1% 1,676,850 0.4% 9,635,123 2.0% 25,978,695 4.8%

Oriental Commercial Bank Ltd 281,589 0.0% 1,262,825 0% 3,494,440 1.2% - - 14,266 0.0% 4,114,491 0.8%

Paramount Universal Bank Ltd - - - - - - - - - - - -

Prime Bank Ltd - - - - - - - - - - - -

Standard Chartered Bank (K) Ltd 79,788,755 11.3% 42,257,450 6% 10,680,668 3.5% 9,195,724 2.3% 43,458,642 8.9% 27,695,026 5.2%

93



Trans – national Bank Ltd 3,194,543 0.5% 3,512,689 0% 2,068,017 0.7% 23,488 0.0% 414,286 0.1% 3,635,949 0.7%

UBA Kenya - - - - - - - - - - - -

Victoria Commercial Bank Ltd 7,844,490 1.1% 3,865,548 1% 21,510 0.0% 123,245 0.0% 512,552 0.1% 5,054,852 0.9%

Total/HHI 708,621,568 709 730,699,050 1149 304,099,493 1006 398,186,646 849 486,358,625 988 536,813,994 770

Source: Genesis calculations

Corporate segment

Table 35: Lending and deposit by bank as of December 2013 (in KSH 000)

Bank Demand deposits

% share Saving

deposits % share

Term deposits

% share Overdraft % share Term loans % share

African Banking Corporation Ltd n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Bank of Africa (K) Ltd 4,714,087 1.1% 27,589 0.1% 14,045,275 4.7% 8,735,386 4.2% 10,515,223 2.1%

Bank of Baroda (K) Ltd 1,614,779 0.4% 859 0.0% 251,422 0.1% 9,593,321 4.7% 6,500,120 1.3%

Bank of India n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Barclays Bank of Kenya Ltd 30,303,888 7.3% 19,842 0.1% 22,892,712 7.7% 6,361,901 3.1% 46,173,026 9.2%

CFC Stanbic Bank (K) Ltd 62,375,273 15.1% 9,628 0.1% 16,030,604 5.4% 14,165,357 6.9% 22,290,267 4.4%

Chase Bank Ltd 3,334,780 0.8% 587,601 3.1% 10,286,252 3.5% 12,217,313 5.9% 4,957,497 1.0%

Citibank N.A. Kenya 37,024,015 8.9% - 0.0% 6,811,425 2.3% 13,183,792 6.4% 12,029,217 2.4%

Commercial Bank of Africa Ltd 29,930,849 7.2% 397,823 2.1% 13,080,540 4.4% 9,506,212 4.6% 18,909,130 3.8%

Consolidated Bank of Kenya Ltd 1,040,966 0.3% 374,885 2.0% 2,359,653 0.8% 695,659 0.3% 3,965,236 0.8%

Co-operative Bank of Kenya Ltd 62,242,949 15.0% 432,035 2.3% 23,413,652 7.9% 7,030,960 3.4% 56,721,683 11.3%

Credit Bank Ltd 740,869 0.2% 36,136 0.2% 1,488,827 0.5% 1,339,147 0.6% 1,316,973 0.3%

Development Bank of Kenya Ltd 208,434 0.1% 32,392 0.2% 9,013,792 3.0% 1,138,012 0.6% 2,944,836 0.6%

Diamond Trust Bank (K) Ltd 684,612 0.2% 4,635 0.0% 5,909,993 2.0% 5,785,021 2.8% 8,109,750 1.6%

Dubai Bank Ltd n/a n/a n/a n/a n/a n/a - 0.0% - 0.0%

Ecobank Kenya Ltd 1,705,338 0.4% - 0.0% 3,952,981 1.3% 2,852,632 1.4% 2,198,062 0.4%

Equatorial Commercial Bank Ltd n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

94



% share Saving

deposits % share

Term deposits


Equity Bank Ltd 4,682,017 1.1% 4,362,523.0 22.9% 2,981,152 1.0% - 0.0% 54,142,099 10.8%

Family Bank Ltd 527,405 0.1% - 0.0% - 0.0% - 0.0% - 0.0%

Fidelity Commercial Bank Ltd - 0.0% - 0.0% - 0.0% 296,001 0.1% 1,923,118 0.4%

First Community Bank Ltd n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Giro Commercial Bank Ltd 1,141,551 0.3% 4,588 0.0% 722,065 0.2% 1,944,366 0.9% 2,760,404 0.5%

Guaranty Trust Bank Ltd 3,942,902 1.0% 16,331 0.1% 3,084,422 1.0% 3,562,825 1.7% 5,411,300 1.1%

Guardian Bank Ltd 2,534,832 0.6% - 0.0% 1,964,284 0.7% 4,430,739 2.1% 3,821,273 0.8%

Gulf African Bank Ltd 1,455,877 0.4% 42,938 0.2% 194,246 0.1% - 0.0% 7,995,993 1.6%

Habib Bank A.G. Zurich 1,296,321 0.3% - 0.0% 1,189,926 0.4% - 0.0% 1,906,477 0.4%

Habib Bank Ltd - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%

Housing Finance Co. of Kenya Ltd 1,010,228 0.2% 4,827,305 25.3% 11,212,501 3.8% 154,736 0.1% 12,423,334 2.5%

I&M Bank Ltd 3,683,023 0.9% - 0.0% 2,707,635 0.9% 13,931,956 6.8% 21,949,518 4.4%

Imperial Bank Ltd n/a n/a n/a n/a n/a n/a 8,810,033 4.3% 8,763,242 1.7%

Jamii Bora Bank Ltd 172,771 0.0% 98,314 0.5% 583,923 0.2% 139,881 0.1% 1,328,783 0.3%

Kenya Commercial Bank Ltd 119,171,383

28.8% 6,854,008 36.0% 60,280,193 20.3% 37,635,246 18.3% 54,277,915 10.8%

K-Rep Bank Ltd 175,238 0.0% 1,552 0.0% 794,535 0.3% - 0.0% 597,520 0.1%

Middle East Bank 331,876 0.1% 1,072 0.0% 967,961 0.3% 1,676,655 0.8% 1,950,694 0.4%

National Bank of Kenya Ltd 2,492,433 0.6% 70,509 0.4% 10,461,442 3.5% 1,532,975 0.7% 4,551,757 0.9%

NIC Bank Ltd 21,724,681 5.2% 14,792 0.1% 34,638,388 11.6% 15,036,906 7.3% 55,320,712 11.0%

Oriental Commercial Bank Ltd 321,706 0.1% 2,968 0.0% 938,151 0.3% - 0.0% 281,589 0.1%

Paramount Universal Bank Ltd n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Prime Bank Ltd n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Standard Chartered Bank (K) Ltd 11,934,503 2.9% 1,185 0.0% 30,321,762 10.2% 19,008,981 9.2% 60,779,774 12.1%

Trans - National Bank Ltd 586,999 0.1% 344,320 1.8% 2,581,370 0.9% 178,665 0.1% 3,015,878 0.6%

UBA Kenya n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Victoria Commercial Bank Ltd 1,132,599 0.3% 492,634 2.6% 2,240,315 0.8% 5,207,104 2.5% 2,637,386 0.5%

Total/HHI 414,239,185

1,508 19,058,464 2,492 297,401,400

907 206,151,783

767 502,469,786

797

95



SME segment



% share Saving deposit

% share Term

deposits % share Overdraft % share Term loans % share



Bank of Baroda (K) Ltd 1,173,232 0.6% 7,758 0.0% 30,155,887 18.6% 3,103,952 4.6% 2,720,201 1.1%


Barclays Bank of Kenya Ltd 46,368,637 22.9% 17,262,247 51.7% - 0.0% 469,141 0.7% 2,383,153 1.0%

CFC Stanbic Bank (K) Ltd 12,328,999 6.1% 1,034,474 3.1% 2,711,364 1.7% 1,272,554 1.9% 10,891,956 4.6%

Chase Bank Ltd 1,630,738 0.8% 1,029,244 3.1% 5,611,311 3.5% 3,986,355 5.9% 2,336,673 1.0%

Citibank N.A. Kenya - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%




Credit Bank Ltd 267,722 0.1% 20,331 0.1% 555,899 0.3% 308,258 0.5% 1,190,315 0.5%

Development Bank of Kenya Ltd - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%

Diamond Trust Bank (K) Ltd 11,376,968 5.6% 43,782 0.1% 21,473,428 13.2% 15,605,689 23.2% 40,000,315 16.9%

Dubai Bank Ltd n/a n/a n/a n/a n/a n/a 2,704,248 4.0% 50,510 0.0%



Equity Bank Ltd 27,992,839 13.8% 6,248,644 18.7% 9,164,698 5.6% 2,788,465 4.1% 56,555,368 23.9%

Family Bank Ltd 5,838,749 2.9% - 0.0% - 0.0% 1,500,995 2.2% 1,797,349 0.8%

Fidelity Commercial Bank Ltd 962,096 0.5% - 0.0% 9,909,235 6.1% 431,885 0.6% 2,977,117 1.3%


Giro Commercial Bank Ltd 1,179,062 0.6% 600,712 1.8% 7,623,217 4.7% 813,717 1.2% 946,501 0.4%

Guaranty Trust Bank Ltd 509,793 0.3% 9,966 0.0% 335,285 0.2% 395,224 0.6% 932,993 0.4%

96



% share Saving deposit

% share Term

deposits % share Overdraft % share Term loans % share

Guardian Bank Ltd 184,231 0.1% - 0.0% 359,654 0.2% - 0.0% - 0.0%

Gulf African Bank Ltd 322,127 0.2% 100,686 0.3% 204,605 0.1% - 0.0% 1,704,815 0.7%

Habib Bank A.G. Zurich 625,769 0.3% - 0.0% 581,934 0.4% - 0.0% 615,465 0.3%

Habib Bank Ltd 1,094,643 0.5% - 0.0% 1,639,765 1.0% 941,009 1.4% 2,372,567 1.0%

Housing Finance Co. of Kenya Ltd - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%

I&M Bank Ltd 7,339,206 3.6% - 0.0% 14,917,150 9.2% 10,173,732 15.1% 16,107,333 6.8%


Jamii Bora Bank Ltd 207,325 0.1% 117,977 0.4% 700,708 0.4% 31,096 0.0% 127,574 0.1%

Kenya Commercial Bank Ltd 29,197,728 14.4% 1,612,547 4.8% 10,190,488 6.3% 1,180,638 1.8% 15,875,378 6.7%

K-Rep Bank Ltd 588,371 0.3% 27,012 0.1% 1,009,666 0.6% 302,904 0.5% 5,129,190 2.2%

Middle East Bank 23,032 0.0% 7,381 0.0% 459,510 0.3% - 0.0% - 0.0%

National Bank of Kenya Ltd 172,575 0.1% 1,342,194 4.0% 4,759,638 2.9% 1,428,388 2.1% 9,245,142 3.9%

NIC Bank Ltd 566,952 0.3% 29,958 0.1% 1,079,940 0.7% 155,738 0.2% 262,862 0.1%

Oriental Commercial Bank Ltd - 0.0% - 0.0% - 0.0% - 0.0% 3,494,440 1.5%



Standard Chartered Bank (K) Ltd 196,553 0.1% 1,750,005 5.2% 7,249,166 4.5% 1,658,351 2.5% 9,022,317 3.8%

Trans - National Bank Ltd 9,559 0.0% 9,205 0.0% 4,724 0.0% 1,858,989 2.8% 209,028 0.1%


Victoria Commercial Bank Ltd 75,887 0.0% 18,724 0.1% 28,634 0.0% 9,647 0.0% 11,863 0.0%

Total/HHI 202,566,688

1,298 33,382,861 3,125 162,237,097

882 67,264,720 1,004 236,834,773

1,164


Personal segment



% share Saving

deposits % share

Term deposits


97



% share Saving

deposits % share

Term deposits



Bank of Africa (K) Ltd 2,663,524 1.7% 725,167 0.5% 7,408,514 3.3% 361,403 1.4% 3,493,726 0.8%

Bank of Baroda (K) Ltd 4,571,708 2.9% 768,478 0.5% 2,522,177 1.1% 809,282 3.1% 1,340,796 0.3%


Barclays Bank of Kenya Ltd 24,320,848 15.6% 2,860,795 1.8% 15,747,881 6.9% 307,051 1.2% 65,960,518 14.3%

CFC Stanbic Bank (K) Ltd 6,449,795 4.1% 6,586,735 4.3% 3,654,331 1.6% 283,156 1.1% 22,398,934 4.9%

Chase Bank Ltd 1,252,373 0.8% 4,767,791 3.1% 7,837,668 3.5% 1,549,020 5.9% 4,540,658 1.0%


Commercial Bank of Africa Ltd 11,240,495 7.2% 3,227,932 2.1% 9,966,792 4.4% 1,205,282 4.6% 17,319,203 3.8%

Consolidated Bank of Kenya Ltd 477,565 0.3% 543,447 0.4% 2,696,559 1.2% 395,334 1.5% 3,213,620 0.7%

Co-operative Bank of Kenya Ltd 23,375,267 15.0% 3,505,530 2.3% 17,840,164 7.9% 891,448 3.4% 51,952,381 11.3%

Credit Bank Ltd 360,960 0.2% 164,430 0.1% 2,032,000 0.9% 13,229 0.1% 398,351 0.1%

Development Bank of Kenya Ltd 79,014 0.1% 81,386 0.1% 1,111,577 0.5% 286,844 1.1% 3,030,268 0.7%

Diamond Trust Bank (K) Ltd 8,083,899 5.2% 4,538,942 2.9% 20,926,422 9.2% 2,363,018 9.0% 1,725,507 0.4%

Dubai Bank Ltd n/a n/a n/a n/a n/a n/a 18,389 0.1% 148,946 0.0%

Ecobank Kenya Ltd 2,728,540 1.8% 2,608,473 1.7% 6,324,768 2.8% 4,564,207 17.5% 3,516,903 0.8%


Equity Bank Ltd 7,229,812 4.6% 82,235,797 53.2% 13,784,469 6.1% 1,269,437 4.9% 43,501,624 9.5%

Family Bank Ltd 15,247,973 9.8% 1,685,864 1.1% 11,296,996 5.0% 2,192 0.0% 25,934,566 5.6%

Fidelity Commercial Bank Ltd - 0.0% 645,605 0.4% - 0.0% 89,157 0.3% 899,232 0.2%


Giro Commercial Bank Ltd - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%

Guaranty Trust Bank Ltd 2,139,207 1.4% 752,566 0.5% 7,656,901 3.4% 39,001 0.1% 422,067 0.1%

Guardian Bank Ltd 2,269,979 1.5% - 0.0% 3,868,003 1.7% 299,574 1.1% 460,097 0.1%

Gulf African Bank Ltd 3,277,885 2.1% 4,159,982 2.7% 2,833,207 1.3% - 0.0% 1,178,352 0.3%

Habib Bank A.G. Zurich 381,846 0.2% 1,576,882 1.0% 2,664,540 1.2% - 0.0% 184,277 0.0%

Habib Bank Ltd 772,930 0.5% - 0.0% 2,044,760 0.9% 46,784 0.2% 166,125 0.0%

98



% share Saving

deposits % share

Term deposits


Housing Finance Co. of Kenya Ltd 660,473 0.4% 3,941,164 2.5% 4,849,123 2.1% - 0.0% 23,584,051 5.1%

I&M Bank Ltd 12,125,565 7.8% 241,129 0.2% 33,832,557 14.9% 1,946,573 7.4% 10,977,817 2.4%


Jamii Bora Bank Ltd 310,988 0.2% 176,965 0.1% 1,051,062 0.5% 22,187 0.1% 2,357,484 0.5%

Kenya Commercial Bank Ltd 7,389,777 4.8% 958,741 0.6% 1,557,916 0.7% 3,430,847 13.1% 92,352,057 20.1%

K-Rep Bank Ltd 1,639,744 1.1% 2,011,913 1.3% 2,894,215 1.3% 102,152 0.4% 3,349,677 0.7%

Middle East Bank 61,498 0.0% 188,763 0.1% 1,559,992 0.7% 75,159 0.3% 138,472 0.0%

National Bank of Kenya Ltd 339,479 0.2% 12,180,859 7.9% 1,785,907 0.8% 353,308 1.4% 23,497,437 5.1%

NIC Bank Ltd 14,745,084 9.5% 1,096,377 0.7% 10,137,234 4.5% 4,044,825 15.5% 5,590,298 1.2%

Oriental Commercial Bank Ltd 254,943 0.2% 381,692 0.2% 3,477,856 1.5% - 0.0% 14,266 0.0%



Standard Chartered Bank (K) Ltd - 0.0% 10,417,320 6.7% 17,277,706 7.6% 117,057 0.4% 43,341,585 9.4%

Trans - National Bank Ltd 1,101,031 0.7% 398,805 0.3% 2,136,113 0.9% 40,093 0.2% 374,192 0.1%


Victoria Commercial Bank Ltd 14,838 0.0% 1,210,746 0.8% 3,829,268 1.7% 204,939 0.8% 307,613 0.1%

Total/HHI 155,567,041

884 154,640,276

3,008 226,606,678

647 26,137,758 982 460,220,867

1,047


Note: While the volume of deposits for Dubai Bank and Imperial Bank is not available by segment, their overall deposits (excluding interbank transactions) were 1,543,397 and 35,026,717 KSH 000.

Other lending products

Table 38: Lending in specific categories as of December 2013 (in KSH 000, Residential mortgages in KSH million)

Bank Consumer

durable loans % share

Credit card loans

% share Mortgages % share Residential mortgages

% share

African Banking Corporation Ltd n/a n/a n/a n/a n/a n/a 2,075 1.5%

Bank of Africa (K) Ltd 41,070 0.1% - 0.0% 2,269,087 1.4% 1,735 1.3%

Bank of Baroda (K) Ltd 55,831 0.1% - 0.0% 457,072 0.3% 394 0.3%

99


Bank Consumer


Credit card loans


% share

Bank of India n/a n/a n/a n/a n/a n/a 91 0.1%

Barclays Bank of Kenya Ltd 4,508 0.0% 3,171,237 47.3% 32,292,705 19.6% 4,640 3.4%

CFC Stanbic Bank (K) Ltd 408,857 0.6% - 0.0% 10,831,059 6.6% 11,621 8.4%

Chase Bank Ltd n/a n/a n/a n/a n/a n/a 1,947 1.4%

Citibank N.A. Kenya - 0.0% 32,402 0.5% - 0.0% - 0.0%

Commercial Bank of Africa Ltd n/a n/a 440,292 6.6% n/a n/a 2,889 2.1%

Consolidated Bank of Kenya Ltd - 0.0% - 0.0% 2,981,884 1.8% 3,686 2.7%

Co-operative Bank of Kenya Ltd n/a n/a 524,916 7.8% n/a n/a 5,911 4.3%

Credit Bank Ltd - 0.0% - 0.0% 52,971 0.0% - 0.0%

Development Bank of Kenya Ltd 1,514,801 2.4% - 0.0% 728,545 0.4% 2,711 2.0%

Diamond Trust Bank (K) Ltd 74,536 0.1% 201,851 3.0% 585,537 0.4% 442 0.3%

Dubai Bank Ltd - 0.0% - 0.0% - 0.0% 3 0.0%

Ecobank Kenya Ltd - 0.0% - 0.0% 2,124,325 1.3% 1,393 1.0%

Equatorial Commercial Bank Ltd n/a n/a n/a n/a n/a n/a 145 0.1%

Equity Bank Ltd 40,288,325 62.5% 52,250 0.8% 4,866,680 2.9% 5,277 3.8%

Family Bank Ltd 14,270,385 22.1% - 0.0% 3,485,983 2.1% 393 0.3%

Fidelity Commercial Bank Ltd - 0.0% - 0.0% - 0.0% 117 0.1%

First Community Bank Ltd n/a n/a n/a n/a n/a n/a 129 0.1%

Giro Commercial Bank Ltd 110,357 0.2% - 0.0% 1,559,284 0.9% 393 0.3%

Guaranty Trust Bank Ltd 2,677 0.0% - 0.0% - 0.0% - 0.0%

Guardian Bank Ltd 70,953 0.1% - 0.0%

- 0.0% 257 0.2%

Gulf African Bank Ltd 1,037,530 1.6% - 0.0% 1,196,681 0.7% 1,197 0.9%

Habib Bank A.G. Zurich 65,823 0.1% - 0.0% - 0.0% - 0.0%

Habib Bank Ltd 18,728 0.0% - 0.0% 36,989 0.0% - 0.0%

Housing Finance Co. of Kenya Ltd - 0.0% - 0.0% 36,007,385 21.8% 35,279 25.5%

I&M Bank Ltd 234,498 0.4% 224,122 3.3% 3,014,964 1.8% 2,743 2.0%

Imperial Bank Ltd 47,862 0.1% 150,099 2.2% 216,646 0.1% 459 0.3%

100


Bank Consumer


Credit card loans


% share

Jamii Bora Bank Ltd - 0.0% - 0.0% 680,622 0.4% 626 0.5%

Kenya Commercial Bank Ltd 1,021,258 1.6% 521,993 7.8% 31,339,963 19.0% 34,030 24.6%

K-Rep Bank Ltd 215,572 0.3% - 0.0% 702,757 0.4% - 0.0%

Middle East Bank - 0.0% - 0.0% 46,233 0.0% 14 0.0%

National Bank of Kenya Ltd 4,786,065 7.4% 75,894 1.1% 12,227,093 7.4% 5,150 3.7%

NIC Bank Ltd 23,834 0.0% 353,649 5.3% 1,679,930 1.0% 1,618 1.2%

Oriental Commercial Bank Ltd 3,132 0.0% - 0.0% 9,309 0.0% 9 0.0%

Paramount Universal Bank Ltd n/a n/a n/a n/a n/a n/a 56 0.0%

Prime Bank Ltd n/a n/a n/a n/a n/a n/a 473 0.3%

Standard Chartered Bank (K) Ltd - 0.0% 962,113 14.3% 14,824,001 9.0% 10,099 7.3%

Trans - National Bank Ltd 137,063 0.2% - 0.0% 850,418 0.5% 98 0.1%

UBA Kenya n/a n/a n/a n/a n/a n/a - 0.0%

Victoria Commercial Bank Ltd - 0.0% - 0.0% 90,194 0.1% 9 0.0%

Total/HHI 64,433,665 4,467 6,710,817 2,658 165,158,317 1,423 138,109 1,471


HHI by County

County Deposit

HHI Lending HHI County

Deposit HHI

Lending HHI County Deposit


Deposit HHI

Lending HHI

Baringo 7,719 6,455 Kiambu 1,755 1,412 Marsabit 5,009 5,840 Samburu 5,409 5,003

Bomet 5,898 4,104 Kilifi 1,974 1,697 Meru 1,583 1,784 Siaya 5,153 5,180

Bungoma 2,699 1,701 Kirinyaga 3,879 3,382 Migori 4,934 3,959 Taita/Taveta 4,802 2,745

Busia 2,511 1,877 Kisii 1,334 1,327 Mombasa 611 831 Tana River 6,945 6,091

Elgeyo/Marakwet 10,000 10,000 Kisumu 936 901 Murang'a 3,421 3,143 Tharaka 5,294 5,272

Embu 2,265 2,023 Kitui 2,749 3,072 Nairobi City 717 781 Trans Nzoia 1,599 1,927

101


County Deposit


Deposit HHI

Lending HHI County Deposit


Deposit HHI

Lending HHI

Garissa 2,798 4,532 Kwale 1,851 2,096 Nakuru 970 923 Turkana 5,914 5,346

Homa Bay 2,662 2,692 Laikipia 1,872 1,496 Nandi 2,683 2,380 Uasin Gishu 951 3,019

Isiolo 2,639 2,646 Lamu 4,212 6,224 Narok 2,791 2,784 Vihiga 5,071 3,760

Kajiado 2,940 2,106 Machakos 2,460 2,312 Nyamira 8,666 6,563 Wajir 5,577 5,504

Kakamega 1,993 1,896 Makueni 4,645 3,286 Nyandarua 4,809 4,163 West Pokot 6,927 5,201

Kericho 1,731 1,470 Mandera 5,013 5,938 Nyeri 1,999 1,799

APPENDIX C: LENDING AND DEPOSIT BY BANK AS OF DECEMBER 2012

Corporate segment



% share Saving

deposits % share

Term deposits




Bank of Baroda (K) Ltd 1,595,578 0.5% 232 0.0% 24,528,907 7.8% 7,698,315 4.1% 8,983,998 2.3%


Barclays Bank of Kenya Ltd 20,540,893 6.6% - 0.0% 15,492,319 4.9% 9,213,747 4.9% 46,195,269 11.7%

CFC Stanbic Bank (K) Ltd 10,460,672 3.4% 990,250 5.7% 10,491,874 3.4% 15,141,659 8.0% 25,211,525 6.4%

Chase Bank Ltd 3,055,694 1.0% 603,272 3.5% 11,735,173 3.7% 12,256,002 6.5% 4,644,965 1.2%

Citibank N.A. Kenya 31,146,668 10.1% - 0.0% 13,568,901 4.3% 9,487,372 5.0% 14,025,843 3.6%



102



% share Saving

deposits % share

Term deposits



Credit Bank Ltd 959,429 0.3% 52,854 0.3% 1,567,698 0.5% 1,150,946 0.6% 861,172 0.2%


Diamond Trust Bank (K) Ltd 514,732 0.2% 3,701 0.0% 2,479,458 0.8% 5,027,737 2.7% 4,685,531 1.2%

Dubai Bank Ltd - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%



Equity Bank Ltd 3,236,232 1.0% 3,750,151 21.7% 5,890,193 1.9% - 0.0% - 0.0%

Family Bank Ltd 631,756 0.2% - 0.0% - 0.0% - 0.0% - 0.0%

Fidelity Commercial Bank Ltd - 0.0% - 0.0% - 0.0% 306,074 0.2% 1,718,593 0.4%


Giro Commercial Bank Ltd 933,931 0.3% 4,459 0.0% 642,381 0.2% 1,739,250 0.9% 2,452,282 0.6%

Guaranty Trust Bank Ltd 2,549,447 0.8% 562,499 3.3% 8,166,356 2.6% 3,231,524 1.7% 4,934,977 1.3%

Guardian Bank Ltd 1,764,010 0.6% 14,053 0.1% 1,343,033 0.4% 3,076,857 1.6% 2,705,081 0.7%

Gulf African Bank Ltd 1,158,803 0.4% 86,354 0.5% 243,754 0.1% - 0.0% 7,405,829 1.9%

Habib Bank A.G. Zurich 1,361,392 0.4% - 0.0% 1,063,754 0.3% - 0.0% 1,624,809 0.4%

Habib Bank Ltd - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%

Housing Finance Co. of Kenya Ltd - 0.0% 4,403,095 25.5% 10,510,891 3.4% - 0.0% 5,176,669 1.3%

I&M Bank Ltd 590,474 0.2% - 0.0% 6,683,044 2.1% 11,868,437 6.3% 17,596,961 4.5%

Imperial Bank Ltd - 0.0% - 0.0% - 0.0% 6,371,013 3.4% 5,756,163 1.5%

Jamii Bora Bank Ltd 221,501 0.1% - 0.0% 564,730 0.2% 66,046 0.0% 427,827 0.1%

Kenya Commercial Bank Ltd 105,546,024

34.1% 5,296,687 30.6% 61,380,810 19.6% 40,715,530 21.6% 61,781,567 15.7%

K-Rep Bank Ltd 655,769 0.2% 2,880 0.0% 117,364 0.0% - 0.0% 573,413 0.1%

Middle East Bank (K) Ltd 462,021 0.1% 1,429 0.0% 1,055,431 0.3% 1,115,777 0.6% 1,864,941 0.5%

National Bank of Kenya Ltd 3,089,065 1.0% - 0.0% 14,778,332 4.7% 2,118,032 1.1% 3,026,401 0.8%

NIC Bank Ltd 18,369,097 5.9% 6,930 0.0% 35,158,409 11.2% 8,831,047 4.7% 37,744,976 9.6%

Oriental Commercial Bank Ltd 262,051 0.1% 1,520 0.0% 964,416 0.3% - 0.0% 294,438 0.1%

103



% share Saving

deposits % share

Term deposits




Standard Chartered Bank (K) Ltd 17,949,771 5.8% 3,133 0.0% 18,100,415 5.8% 15,154,950 8.0% 55,506,082 14.1%

Trans - National Bank Ltd 732,742 0.2% 308,049 1.8% 2,309,543 0.7% 1,302,246 0.7% 1,560,206 0.4%


Victoria Commercial Bank Ltd 1,165,025 0.4% 327,314 1.9% 1,618,179 0.5% 3,457,011 1.8% 1,490,425 0.4%

Total/HHI 309,615,079

1,711 17,291,432 2,128 312,980,950

843 188,533,872

862 393,803,515

911


SME segment



% share Saving

deposits % share

Term deposits




Bank of Baroda (K) Ltd 1,194,068 0.6% 8,937 0.0% 1,343,329 1.1% 2,347,372 4.0% 1,327,755 0.5%


Barclays Bank of Kenya Ltd 50,551,531 25.8% 17,434,410 56.9% - 0.0% 276,991 0.5% 3,106,845 1.2%

CFC Stanbic Bank (K) Ltd - 0.0% 50,780 0.2% 2,466,368 2.0% 897,897 1.5% 9,093,600 3.6%

Chase Bank Ltd 1,934,373 1.0% 1,069,836 3.5% 4,572,765 3.7% 3,784,318 6.5% 3,016,046 1.2%





Credit Bank Ltd 26,893 0.0% 305 0.0% 312,745 0.3% 447,091 0.8% 465,451 0.2%

Development Bank of Kenya Ltd - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%

104



% share Saving

deposits % share

Term deposits


Diamond Trust Bank (K) Ltd 11,062,605 5.6% 30,953 0.1% 21,858,659 17.9% 15,957,057 27.4% 33,098,175 12.9%

Dubai Bank Ltd - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%



Equity Bank Ltd 23,555,497 12.0% 6,248,892 20.4% 9,838,311 8.1% 2,842,870 4.9% 84,870,585 33.2%

Family Bank Ltd 4,013,233 2.0% - 0.0% - 0.0% 1,321,418 2.3% 1,303,869 0.5%

Fidelity Commercial Bank Ltd 930,688 0.5% - 0.0% 9,024,857 7.4% 465,878 0.8% 2,831,378 1.1%


Giro Commercial Bank Ltd 1,036,396 0.5% 593,120 1.9% 7,003,440 5.7% 454,848 0.8% 799,685 0.3%


Guardian Bank Ltd 265,593 0.1% 3,823 0.0% 205,203 0.2% 242,416 0.4% 871,698 0.3%

Gulf African Bank Ltd 293,628 0.1% 34,058 0.1% 21,000 0.0% - 0.0% 1,276,839 0.5%

Habib Bank A.G. Zurich 687,503 0.4% - 0.0% 347,574 0.3% - 0.0% 381,168 0.1%

Habib Bank Ltd 1,468,783 0.7% - 0.0% 239,097 0.2% 950,959 1.6% 2,401,657 0.9%

Housing Finance Co. of Kenya Ltd - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%

I&M Bank Ltd 10,378,559 5.3% - 0.0% 11,974,893 9.8% 7,841,615 13.5% 13,442,367 5.3%

Imperial Bank Ltd - 0.0% - 0.0% - 0.0% 2,524,463 4.3% 1,910,071 0.7%

Jamii Bora Bank Ltd 8 0.0% - 0.0% - 0.0% 1,485 0.0% 20,165 0.0%

Kenya Commercial Bank Ltd 30,445,285 15.5% 1,547,852 5.0% 11,175,701 9.2% 1,851,411 3.2% 12,549,084 4.9%

K-Rep Bank Ltd 995,001 0.5% 888,366 2.9% 1,780,359 1.5% 200,741 0.3% 5,903,796 2.3%

Middle East Bank (K) Ltd 27,183 0.0% 16,178 0.1% 464,844 0.4% - 0.0% - 0.0%

National Bank of Kenya Ltd - 0.0% - 0.0% - 0.0% 353,495 0.6% 449,544 0.2%

NIC Bank Ltd 319,320 0.2% 1,237 0.0% 815,314 0.7% 332,789 0.6% 14,293,009 5.6%

Oriental Commercial Bank Ltd - 0.0% - 0.0% - 0.0% - 0.0% 2,973,553 1.2%



Standard Chartered Bank (K) Ltd 53,778 0.0% 1,270,834 4.1% 8,147,743 6.7% 1,458,547 2.5% 10,052,108 3.9%

105



% share Saving

deposits % share

Term deposits


Trans - National Bank Ltd 13,539 0.0% 13,032 0.0% 6,691 0.0% 1,225,961 2.1% 225,099 0.1%


Victoria Commercial Bank Ltd 74,931 0.0% 20,236 0.1% 21,376 0.0% 14,522 0.0% 8,650 0.0%

Total/HHI 195,998,376

1,445 30,664,452 3,721 121,957,158

869 58,214,107 1,171 255,702,618

1,537


Personal segment



% share Saving

deposits % share

Term deposits



Bank of Africa (K) Ltd 2,940,616 2.4% 513,080 0.4% 8,028,351 4.1% 562,390 2.1% 2,625,804 0.7%

Bank of Baroda (K) Ltd 4,194,176 3.4% 679,942 0.5% 3,794,727 1.9% 677,678 2.6% 1,318,180 0.4%


Barclays Bank of Kenya Ltd 21,682,789 17.4% 2,092,903 1.5% 12,059,222 6.1% 276,914 1.1% 53,529,793 15.1%

CFC Stanbic Bank (K) Ltd - 0.0% 4,693,935 3.5% 2,740,062 1.4% 65,233 0.2% 17,467,078 4.9%

Chase Bank Ltd 1,227,825 1.0% 4,711,527 3.5% 7,427,293 3.7% 1,712,368 6.5% 4,173,818 1.2%


Commercial Bank of Africa Ltd 10,428,727 8.4% 1,271,235 0.9% 7,967,274 4.0% 1,031,533 3.9% 11,704,991 3.3%

Consolidated Bank of Kenya Ltd 860,408 0.7% 402,492 0.3% 3,993,078 2.0% 12,862 0.0% 1,514,298 0.4%

Co-operative Bank of Kenya Ltd 19,549,391 15.7% 2,813,167 2.1% 18,604,504 9.4% 1,141,155 4.3% 39,496,778 11.2%

Credit Bank Ltd 280,350 0.2% 207,331 0.2% 1,635,904 0.8% 48,970 0.2% 382,909 0.1%


Diamond Trust Bank (K) Ltd 6,501,892 5.2% 3,921,897 2.9% 19,681,475 9.9% 1,805,207 6.9% 1,259,046 0.4%

Dubai Bank Ltd - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%

Ecobank Kenya Ltd 2,546,482 2.0% 1,330,840 1.0% 5,539,769 2.8% 3,236,941 12.3% 3,098,340 0.9%


106



% share Saving

deposits % share

Term deposits


Equity Bank Ltd 6,115,797 4.9% 71,495,022 52.9% 12,233,723 6.2% 1,172,139 4.4% 37,647,228 10.6%

Family Bank Ltd 12,147,850 9.8% 1,154,505 0.9% 6,682,935 3.4% 1,520 0.0% 17,165,100 4.9%

Fidelity Commercial Bank Ltd - 0.0% 584,291 0.4% - 0.0% 31,888 0.1% 518,677 0.1%


Giro Commercial Bank Ltd - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%


Guardian Bank Ltd 2,135,913 1.7% 732,340 0.5% 3,909,505 2.0% 267,661 1.0% 479,829 0.1%

Gulf African Bank Ltd 3,094,685 2.5% 3,860,966 2.9% 2,410,258 1.2% - 0.0% 914,714 0.3%

Habib Bank A.G. Zurich 309,346 0.2% 1,611,499 1.2% 2,351,739 1.2% - 0.0% 94,586 0.0%

Habib Bank Ltd 1,351,703 1.1% - 0.0% 2,062,898 1.0% 17,699 0.1% 109,598 0.0%

Housing Finance Co. of Kenya Ltd - 0.0% 3,953,519 2.9% 4,100,704 2.1% - 0.0% 25,841,953 7.3%

I&M Bank Ltd 7,757,119 6.2% 200,025 0.1% 32,204,448 16.3% 1,090,558 4.1% 4,786,652 1.4%

Imperial Bank Ltd - 0.0% - 0.0% - 0.0% 963,047 3.7% 2,311,693 0.7%

Jamii Bora Bank Ltd 53,707 0.0% 343,196 0.3% 36,074 0.0% 7,800 0.0% 1,010,368 0.3%

Kenya Commercial Bank Ltd 7,978,479 6.4% 958,741 0.7% 1,563,588 0.8% 7,098,394 26.9% 69,548,513 19.7%

K-Rep Bank Ltd 381,940 0.3% 1,757,967 1.3% 55,465 0.0% 82,696 0.3% 795,496 0.2%

Middle East Bank (K) Ltd 80,442 0.1% 194,518 0.1% 1,506,419 0.8% 55,718 0.2% 138,909 0.0%

National Bank of Kenya Ltd - 0.0% 13,146,285 9.7% 1,905,384 1.0% 585,489 2.2% 16,815,043 4.8%

NIC Bank Ltd 10,886,356 8.8% 979,470 0.7% 10,909,919 5.5% 3,798,525 14.4% 3,608,100 1.0%

Oriental Commercial Bank Ltd 195,967 0.2% 268,443 0.2% 3,113,827 1.6% - 0.0% 24,045 0.0%



Standard Chartered Bank (K) Ltd - 0.0% 9,388,087 7.0% 14,493,281 7.3% 111,790 0.4% 32,251,544 9.1%

Trans - National Bank Ltd 1,016,848 0.8% 364,554 0.3% 1,925,834 1.0% 191,882 0.7% 156,362 0.0%


Victoria Commercial Bank Ltd 26,877 0.0% 1,156,693 0.9% 3,174,907 1.6% 95,181 0.4% 230,531 0.1%

Total/HHI 124,408,105

958 135,045,308

3,011 198,088,361

707 26,341,321 1,278 353,859,347

1,078

107



Specific Lending Products

Table 42: Lending in specific categories as of December 2012 (in KSH 000)

Bank Consumer durable loans % share Credit card loans % share Mortgages % share

African Banking Corporation Ltd n/a n/a n/a n/a n/a n/a

Bank of Africa (K) Ltd 22,387 0.0% - 0.0% 1,194,051 1.0%

Bank of Baroda (K) Ltd 55,176 0.1% - 0.0% 433,692 0.4%

Bank of India n/a n/a n/a n/a n/a n/a

Barclays Bank of Kenya Ltd 7,958 0.0% 3,140,389

51.8% 18,432,180 15.6%

CFC Stanbic Bank (K) Ltd 1,328,110

2.2% 99,099 1.6% 9,209,417 7.8%

Chase Bank Ltd n/a n/a n/a n/a n/a n/a

Citibank N.A. Kenya - 0.0% 9,571 0.2% - 0.0%

Commercial Bank of Africa Ltd - - 444,168 7.3% - -

Consolidated Bank of Kenya Ltd - 0.0% - 0.0% 3,141,421 2.7%

Co-operative Bank of Kenya Ltd - - 507,302 8.4% - -

Credit Bank Ltd - 0.0% - 0.0% 149,038 0.1%

Development Bank of Kenya Ltd 7,227,028

11.8% - 0.0% 935,362 0.8%

Diamond Trust Bank (K) Ltd 67,510 0.1% 209,695 3.5% 462,254 0.4%

Dubai Bank Ltd - 0.0% - 0.0% - 0.0%

Ecobank Kenya Ltd - 0.0% - 0.0% 2,232,586 1.9%

Equatorial Commercial Bank Ltd n/a n/a n/a n/a n/a n/a

Equity Bank Ltd 36,288,030 59.5% 44,534 0.7% 3,737,940 3.2%

Family Bank Ltd 8,641,423 14.2% - 0.0% 1,605,844 1.4%

Fidelity Commercial Bank Ltd 8 0.0% - 0.0% 2 0.0%

First Community Bank Ltd n/a n/a n/a n/a n/a n/a

Giro Commercial Bank Ltd 105,580 0.2% - 0.0% 1,044,199 0.9%

108


Bank Consumer durable loans % share Credit card loans % share Mortgages % share

Guaranty Trust Bank Ltd - 0.0% - 0.0% - 0.0%

Guardian Bank Ltd 18,331 0.0% - 0.0% 2 0.0%

Gulf African Bank Ltd 864,003 1.4% - 0.0% 3,140,902 2.7%

Habib Bank A.G. Zurich - 0.0% - 0.0% 17,991 0.0%

Habib Bank Ltd 65,823 0.1% - 0.0% - 0.0%

Housing Finance Co. of Kenya Ltd - 0.0% - 0.0% 31,018,622 26.2%

I&M Bank Ltd 412,878 0.7% 189,087 3.1% 2,309,121 1.9%

Imperial Bank Ltd 60,165 0.1% 153,370 2.5% 178,848 0.2%

Jamii Bora Bank Ltd - 0.0% - 0.0% 218,344 0.2%

Kenya Commercial Bank Ltd 619,716 1.0% 485,516 8.0% 18,215,430 15.4%

K-Rep Bank Ltd 158,685 0.3% - 0.0% 666,257 0.6%

Middle East Bank - 0.0% - 0.0% 45,642 0.0%

National Bank of Kenya Ltd 4,820,293 7.9% 66,433 1.1% 6,539,548 5.5%

NIC Bank Ltd 27,699 0.0% 276,677 4.6% 714,814 0.6%

Oriental Commercial Bank Ltd 86,152 0.1% - 0.0% 16,717 0.0%

Paramount Universal Bank Ltd n/a n/a n/a n/a n/a n/a

Prime Bank Ltd n/a n/a n/a n/a n/a n/a

Standard Chartered Bank (K) Ltd - 0.0% 432,754 7.1% 12,224,786 10.3%

Trans - National Bank Ltd 126,014 0.2% - 0.0% 596,150 0.5%

UBA Kenya n/a n/a n/a n/a n/a n/a

Victoria Commercial Bank Ltd 226 0.0% - 0.0% - 0.0%

Total/HHI 61,003,195 3950.4 6,058,595 2979.2 118,481,160 1398.0


109


APPENDIX D: RISK SPREAD BY BANK AS OF DECEMBER 2013

Table 43: Risk free rate in Kenya as of 31 December 2013

Tenor Yield

0 to 3 months 9%

Over 3 to 12 months 10%

Over 1 to 2 years 11%

Over 2 to 5 years 11%

Over 5 years 13%

Overdraft/Loan 8%


Corporate segment

Table 44: Lending spread by bank as of December 2013 in the corporate segment

Bank Overdraft/Loan 0 to 3 months Over 3 to 12 months Over 1 to 2 years Over 2 to 5 years Over 5 years

Bank of Africa (K) Ltd 5.6% -3.0% 7.0% 4.4% 2.0% 0.1%

Bank of Baroda (K) Ltd 8.0% 9.0% 8.3% 7.2% 6.1% 4.8%

Barclays Bank of Kenya Ltd 7.6% 7.3% 5.9% 5.4% 4.6% 3.0%

Citibank N.A. Kenya -1.7% 3.0% 2.5% 2.0% 1.1% -0.6%

Consolidated Bank of Kenya Ltd 8.8% n/a n/a n/a n/a n/a

Credit Bank Ltd 9.5% 10.1% 8.6% 9.1% 7.6% 4.9%

Development Bank of Kenya Ltd 11.4% 11.7% 9.4% 8.8% 6.9% 6.6%

Diamond Trust Bank (K) Ltd 6.8% 9.4% 6.8% 2.7% 0.8% 4.4%

Dubai Bank Ltd n/a n/a n/a n/a n/a n/a

Ecobank Kenya Ltd 13.3% 13.0% 11.6% 11.1% 10.3% 8.7%

Equity Bank Ltd n/a 8.2% 6.9% 6.3% 5.5% 3.9%

Family Bank Ltd n/a n/a n/a n/a n/a n/a

Fidelity Commercial Bank Ltd 10.0% 7.1% 5.9% 6.7% 6.4% n/a

Guaranty Trust Bank Ltd 11.0% 10.2% 9.2% 8.4% 7.8% 5.0%

110



Giro Commercial Bank Ltd 5.5% 6.2% 6.9% 6.3% 5.5% 2.9%

Guardian Bank Ltd -1.2% -1.5% -2.8% -3.4% -4.2% -5.8%

Gulf African Bank Ltd n/a 8.0% 6.8% 6.6% 5.3% 4.3%

Habib Bank Ltd n/a n/a n/a n/a n/a n/a

Habib Bank A.G. Zurich n/a 6.3% 4.1% 2.3% 3.7% n/a

Housing Finance Co. of Kenya Ltd 10.9% 7.1% 5.9% 5.3% 4.1% 2.6%

I&M Bank Ltd 8.0% 8.9% 6.0% 6.0% 4.7% 2.3%

Imperial Bank Ltd 12.5% 0.3% 4.3% 8.5% 6.7% -0.8%

Jamii Bora Bank Ltd 14.0% 13.2% 11.9% 11.3% 10.5% 8.9%

Kenya Commercial Bank Ltd 5.6% 4.2% 3.3% 3.1% 2.3% 0.7%

K-Rep Bank Ltd n/a 15.1% 12.8% 5.1% 8.2% 7.6%

Middle East Bank (K) Ltd 12.6% 8.0% 12.9% 7.8% 6.6% 4.0%

National Bank of Kenya Ltd 9.5% 9.1% 7.8% 9.8% 9.0% 5.7%

NIC Bank Ltd 11.1% 9.1% 8.3% 7.7% 6.8% 1.4%

Oriental Commercial Bank Ltd n/a 9.6% 7.8% n/a n/a n/a

CFC Stanbic Bank (K) Ltd -1.3% -5.4% -8.7% 3.3% 7.5% 1.9%

Standard Chartered Bank (K) Ltd 6.3% 5.2% 3.1% 3.7% 2.0% 0.7%

Trans - National Bank Ltd 12.5% 12.0% 10.6% 10.1% 9.3% 5.9%

Victoria Commercial Bank Ltd 8.8% n/a n/a 6.3% 6.3% 4.5%


Note: n/a in a tenor implies that the bank offered no loans over that tenor

Table 45: Deposit spread by bank as of December 2013 in the corporate segment

Bank Demand Savings 0 to 3 months Over 3 to 12 months

Over 1 to 2 years Over 2 to 5 years Over 5 years

Bank of Africa (K) Ltd -5.4% -8.5% 2.7% 0.8% n/a n/a n/a

Bank of Baroda (K) Ltd -5.4% -7.2% 1.6% -1.0% n/a -11.5% n/a

Barclays Bank of Kenya Ltd -4.3% -8.5% -4.1% -3.2% -4.1% n/a n/a

Citibank N.A. Kenya 0.1% n/a 0.1% -0.8% -0.3% n/a n/a

111




Consolidated Bank of Kenya Ltd -8.5% -5.8% -5.2% -2.4% n/a n/a n/a

Credit Bank Ltd -8.5% -8.5% 1.0% -0.1% n/a -2.0% n/a

Development Bank of Kenya Ltd -8.5% -6.0% 2.4% -2.6% 1.3% -7.3% n/a

Diamond Trust Bank (K) Ltd -8.3% -8.0% 3.8% -2.6% -2.2% -2.5% -5.8%

Dubai Bank Ltd n/a n/a n/a n/a n/a n/a n/a

Ecobank Kenya Ltd -8.5% n/a 4.1% 2.8% 2.2% 1.4% -0.2%

Equity Bank Ltd -8.5% -8.5% 1.0% -0.1% -0.7% -1.0% n/a

Family Bank Ltd -8.5% n/a n/a n/a n/a n/a n/a

Fidelity Commercial Bank Ltd n/a n/a n/a n/a n/a n/a n/a

Guaranty Trust Bank Ltd -7.8% -5.2% 0.5% -0.7% n/a n/a n/a

Giro Commercial Bank Ltd -4.5% -6.5% 0.2% -0.1% n/a n/a n/a

Guardian Bank Ltd -8.5% n/a -4.8% -6.2% n/a n/a n/a

Gulf African Bank Ltd -8.5% -7.5% 0.4% -2.4% n/a n/a n/a

Habib Bank Ltd n/a n/a n/a n/a n/a n/a n/a

Habib Bank A.G. Zurich -8.5% n/a 0.6% 0.2% n/a n/a n/a

Housing Finance Co. of Kenya Ltd -8.5% -6.1% 1.8% 0.1% n/a n/a n/a

I&M Bank Ltd -8.4% n/a 1.1% -4.1% -2.8% n/a -8.6%

Imperial Bank Ltd n/a n/a n/a n/a n/a n/a n/a

Jamii Bora Bank Ltd -8.5% -6.5% -5.8% n/a n/a n/a n/a

Kenya Commercial Bank Ltd -8.3% -6.5% -3.3% -3.8% n/a n/a n/a

K-Rep Bank Ltd n/a n/a -0.4% -0.8% -10.7% n/a n/a

Middle East Bank (K) Ltd -1.8% -6.1% 0.1% -0.8% -1.2% n/a n/a

National Bank of Kenya Ltd -5.5% -7.5% 0.2% -3.1% n/a n/a n/a

NIC Bank Ltd -7.1% -6.7% 0.8% -0.3% -2.7% -2.4% -8.1%

Oriental Commercial Bank Ltd -8.2% -4.9% 2.3% 0.1% -3.5% -11.5% n/a

CFC Stanbic Bank (K) Ltd -7.6% -8.3% n/a -9.5% -10.1% n/a n/a

Standard Chartered Bank (K) Ltd 0.7% -8.2% -4.4% -3.6% -3.9% n/a n/a

Trans - National Bank Ltd -8.5% -8.5% 2.2% 1.9% -3.7% n/a n/a

112




Victoria Commercial Bank Ltd -8.5% 0.2% 0.7% -2.0% -3.7% n/a n/a


Note: n/a in a tenor implies that the bank accepted no deposits over that tenor

SME segment

Table 46: Lending spread by bank as of December 2013 in the SME segment


Bank of Africa (K) Ltd 9.6% 3.6% 7.2% 7.6% 6.9% 3.8%


Barclays Bank of Kenya Ltd 15.3% 14.2% 12.9% 12.3% 11.5% n/a

Citibank N.A. Kenya n/a n/a n/a n/a n/a n/a


Credit Bank Ltd 9.5% 1.3% 9.4% 10.1% 8.5% 5.4%

Development Bank of Kenya Ltd n/a n/a n/a n/a n/a n/a


Dubai Bank Ltd 8.2% n/a n/a n/a n/a n/a


Equity Bank Ltd 10.5% 10.2% 8.9% 8.3% 7.5% 5.9%

Family Bank Ltd 14.0% n/a 10.3% 9.8% 9.0% n/a

Fidelity Commercial Bank Ltd 7.3% 8.8% 7.8% 7.8% 7.8% 5.5%



Guardian Bank Ltd n/a n/a n/a n/a n/a n/a


Habib Bank Ltd 8.1% 7.6% 8.2% 4.9% 4.6% n/a

Habib Bank A.G. Zurich n/a 9.7% 6.3% 6.1% 5.5% 3.7%

Housing Finance Co. of Kenya Ltd n/a n/a n/a n/a n/a n/a

113



I&M Bank Ltd 9.0% 9.8% 5.9% 4.7% 4.7% 3.8%

Imperial Bank Ltd 11.0% 0.3% 4.3% 8.5% 6.7% n/a



K-Rep Bank Ltd 15.0% 26.4% 20.3% 20.1% 15.1% 7.4%

Middle East Bank (K) Ltd 14.5% n/a n/a n/a n/a n/a


NIC Bank Ltd 15.5% 9.2% 9.5% 8.5% 7.5% 3.2%

Oriental Commercial Bank Ltd n/a 8.4% 6.7% 7.1% 6.8% 3.7%

CFC Stanbic Bank (K) Ltd 14.5% -3.5% 6.3% -1.7% 12.5% 5.9%


Trans - National Bank Ltd 18.0% 17.2% 15.9% 15.3% n/a n/a




Table 47: Deposit spread by bank as of December 2013 in the SME segment



Bank of Africa (K) Ltd -7.7% -8.3% 1.6% -0.3% -5.9% -6.5% n/a

Bank of Baroda (K) Ltd -6.9% -6.8% 0.7% -0.6% -2.7% -8.8% -13.1%

Barclays Bank of Kenya Ltd -8.5% -7.7% -3.1% -1.4% n/a n/a n/a

Citibank N.A. Kenya n/a n/a n/a n/a n/a n/a n/a


Credit Bank Ltd -8.5% -8.5% 3.3% 0.3% n/a -1.9% n/a

Development Bank of Kenya Ltd n/a n/a n/a n/a n/a n/a n/a

Diamond Trust Bank (K) Ltd -8.4% -7.8% -0.7% -1.5% -3.5% -7.0% -3.6%



114




Equity Bank Ltd -8.5% -8.5% 0.2% -0.6% -0.9% -1.5% -3.1%


Fidelity Commercial Bank Ltd -8.5% n/a -0.6% -1.7% n/a n/a n/a

Guaranty Trust Bank Ltd -7.8% -5.7% 0.9% -1.5% -2.7% n/a n/a

Giro Commercial Bank Ltd -6.5% -6.5% 0.2% -1.1% -1.7% n/a n/a

Guardian Bank Ltd -8.5% n/a -4.8% n/a n/a n/a n/a


Habib Bank Ltd -8.3% n/a -2.5% -1.6% n/a n/a n/a

Habib Bank A.G. Zurich -8.5% n/a -0.1% -2.4% n/a n/a n/a

Housing Finance Co. of Kenya Ltd n/a n/a n/a n/a n/a n/a n/a

I&M Bank Ltd -8.4% n/a 0.9% -3.4% -5.3% -4.0% -8.2%



Kenya Commercial Bank Ltd -8.3% -6.4% -5.3% n/a n/a n/a n/a

K-Rep Bank Ltd -8.5% -6.5% -1.2% -1.9% -4.2% -7.0% n/a

Middle East Bank (K) Ltd -3.8% -6.3% 1.9% -0.1% n/a n/a n/a

National Bank of Kenya Ltd -4.5% -7.5% -1.8% -4.1% n/a n/a n/a

NIC Bank Ltd -7.0% -7.1% 0.5% -1.7% n/a -4.6% -8.2%

Oriental Commercial Bank Ltd n/a n/a n/a n/a n/a n/a n/a

CFC Stanbic Bank (K) Ltd -8.2% 0.3% n/a -2.3% -2.9% n/a n/a

Standard Chartered Bank (K) Ltd -3.0% -6.5% -0.6% -1.2% 3.7% 0.6% n/a

Trans - National Bank Ltd n/a n/a n/a n/a n/a n/a n/a

Victoria Commercial Bank Ltd -8.5% -8.5% -0.9% -4.2% -9.7% n/a n/a



115


Personal segment

Table 48: Lending spread by bank as of December 2013 in the personal segment


Bank of Africa (K) Ltd 8.5% -1.0% 6.6% 6.4% 5.0% -0.5%





Credit Bank Ltd 17.0% 10.7% 6.3% 5.3% 3.3% -4.1%

Development Bank of Kenya Ltd 14.6% 10.6% 9.3% 6.2% 4.6% -2.0%

Diamond Trust Bank (K) Ltd 7.0% n/a 6.2% 1.9% 0.7% 0.9%

Dubai Bank Ltd 8.2% n/a n/a n/a n/a 7.9%


Equity Bank Ltd 10.5% 10.2% 8.9% 8.3% 7.5% 4.9%

Family Bank Ltd 10.7% n/a 5.7% 5.2% 4.4% 2.8%



Giro Commercial Bank Ltd n/a n/a n/a n/a n/a n/a

Guardian Bank Ltd -1.2% n/a n/a n/a -4.2% -5.8%

Gulf African Bank Ltd n/a 8.7% 4.0% 4.9% 2.1% -1.4%

Habib Bank Ltd -0.2% 9.0% 4.0% 0.2% 3.9% -8.1%

Habib Bank A.G. Zurich n/a 8.5% 7.5% 10.9% 4.4% n/a

Housing Finance Co. of Kenya Ltd n/a -2.9% 5.7% 3.9% 3.0% 0.1%

I&M Bank Ltd 7.7% 9.6% 7.1% 5.2% 5.3% 2.3%




K-Rep Bank Ltd 15.0% 18.3% 17.9% 16.4% 13.0% 6.5%

116



Middle East Bank (K) Ltd 14.1% 16.7% 3.9% 0.7% -1.0% -0.2%


NIC Bank Ltd 13.1% 13.6% 1.8% 2.6% 2.6% -2.5%

Oriental Commercial Bank Ltd n/a 5.7% 3.6% 2.1% 0.9% -3.1%

CFC Stanbic Bank (K) Ltd 18.5% 1.0% 3.2% -4.7% 11.5% 7.9%



Victoria Commercial Bank Ltd 7.7% n/a n/a 5.5% 3.8% -2.0%



Table 49: Deposit spread by bank as of December 2013 in the personal segment



Bank of Africa (K) Ltd -6.6% -8.1% 1.7% 0.0% -3.9% n/a n/a

Bank of Baroda (K) Ltd -6.7% -6.7% -0.5% -1.2% -3.3% -7.4% -13.1%

Barclays Bank of Kenya Ltd -8.5% -7.7% -3.1% -1.4% -3.1% -4.4% n/a



Credit Bank Ltd -8.5% -8.5% 2.1% 1.2% n/a -1.8% n/a

Development Bank of Kenya Ltd -8.5% -6.0% 2.4% 2.1% -4.2% n/a n/a

Diamond Trust Bank (K) Ltd -8.4% -8.1% -0.7% -2.1% -3.7% -5.4% -5.5%


Ecobank Kenya Ltd -8.5% -4.9% 4.1% 2.8% 2.2% 1.4% -0.2%

Equity Bank Ltd -8.5% -8.0% -1.8% -2.6% -2.7% -3.5% -5.1%

Family Bank Ltd -8.5% -7.5% -5.4% -5.9% n/a n/a n/a

Fidelity Commercial Bank Ltd n/a -2.5% n/a n/a n/a n/a n/a

Guaranty Trust Bank Ltd -7.6% -4.4% 0.8% -0.8% -0.6% -1.5% n/a

Giro Commercial Bank Ltd n/a n/a n/a n/a n/a n/a n/a

117




Guardian Bank Ltd -8.5% n/a -4.8% -6.2% -6.7% n/a n/a


Habib Bank Ltd -8.5% n/a -1.5% -1.6% n/a n/a n/a

Habib Bank A.G. Zurich -8.5% -8.5% -0.5% -1.1% n/a n/a n/a

Housing Finance Co. of Kenya Ltd -8.5% -7.1% -0.5% -1.4% 0.4% -8.9% -2.9%

I&M Bank Ltd -8.4% -8.5% 0.5% -3.0% -4.7% -4.1% -10.0%




K-Rep Bank Ltd -8.5% -6.5% -1.4% -3.4% -4.1% n/a -4.9%

Middle East Bank (K) Ltd -0.5% -6.2% 0.7% -1.2% -3.3% n/a -13.1%

National Bank of Kenya Ltd -8.5% -8.3% -3.8% -6.1% n/a n/a n/a

NIC Bank Ltd -6.9% -7.1% -0.3% -3.5% -7.2% -5.3% -7.1%

Oriental Commercial Bank Ltd -8.0% -4.9% 2.2% 0.5% -1.5% -1.8% n/a

CFC Stanbic Bank (K) Ltd -8.2% -8.3% n/a -9.5% -10.7% n/a n/a

Standard Chartered Bank (K) Ltd n/a -7.4% -0.1% -1.6% 0.3% 0.8% n/a

Trans - National Bank Ltd -8.5% -8.5% -6.8% -6.1% -8.7% n/a n/a

Victoria Commercial Bank Ltd -8.5% -2.0% 0.6% -1.3% -9.7% n/a n/a



118


APPENDIX E: RISK SPREAD BY BANK AS OF DECEMBER 2012

Corporate segment

Table 50: Lending spread by bank as of December 2012 in the corporate segment



Bank of Baroda (K) Ltd -3.0% 10.3% 9.0% 8.8% 7.6% 3.7%


Citibank N.A. Kenya 6.9% 2.3% 2.8% 4.7% 0.5% -0.6%

Consolidated Bank of Kenya Ltd 15.5% 15.2% 13.9% 12.3% 10.5% 7.4%

Credit Bank Ltd 6.1% 11.0% 12.3% 9.1% 9.7% 5.3%





Equity Bank Ltd n/a n/a n/a n/a n/a n/a

Family Bank Ltd n/a n/a n/a n/a n/a n/a




Guardian Bank Ltd 1.7% 1.4% 0.1% -0.5% -1.3% -2.9%


Habib Bank Ltd n/a n/a n/a n/a n/a n/a


Housing Finance Co. of Kenya Ltd n/a 9.2% 7.9% 7.1% n/a 4.9%

I&M Bank Ltd 11.0% 4.7% 6.5% -0.6% 2.3% 2.8%


Jamii Bora Bank Ltd 15.5% 12.2% 16.9% -10.7% 10.5% -13.1%


119



K-Rep Bank Ltd n/a n/a n/a n/a 4.5% n/a

Middle East Bank (K) Ltd 16.1% 9.6% 11.5% n/a 8.6% 6.0%

National Bank of Kenya Ltd 10.5% n/a n/a 10.8% n/a 6.7%

NIC Bank Ltd 11.1% 8.5% 8.0% 8.1% 6.3% 3.8%

Oriental Commercial Bank Ltd n/a 12.7% 10.1% -0.2% n/a n/a

CFC Stanbic Bank (K) Ltd 10.5% n/a n/a 3.3% 7.5% 1.9%

Standard Chartered Bank (K) Ltd 6.5% 4.2% 1.7% 2.9% 3.0% -1.1%





Table 51: Average lending spread of top 4 and the other banks in the corporate segment

Lending Overdraft 0-3 months 3-12 months 1-2 years 2-5 years Over 5 years

Top 4 8.8% 7.8% 6.7% 6.7% 5.9% 3.4%

Other banks 10.2% 9.5% 9.0% 6.1% 7.2% 3.6%

Number of banks 24 25 25 27 26 26


Table 52: Deposit spread by bank as of December 2012 in the corporate segment



Bank of Africa (K) Ltd 1.8% -7.8% 6.4% 6.0% n/a n/a n/a

Bank of Baroda (K) Ltd -4.4% -7.2% 3.1% 0.5% -2.6% -1.0% n/a

Barclays Bank of Kenya Ltd 1.5% n/a 0.4% -2.5% n/a n/a n/a

Citibank N.A. Kenya -3.2% n/a -2.6% -0.1% 4.6% -9.3% n/a

Consolidated Bank of Kenya Ltd -8.5% -6.1% -3.0% 5.1% n/a n/a n/a

Credit Bank Ltd -8.5% -8.5% 2.7% 1.2% n/a 4.3% n/a

Development Bank of Kenya Ltd -8.5% -6.0% 4.9% -0.3% -5.2% n/a n/a

Diamond Trust Bank (K) Ltd -8.1% -7.5% 0.1% 0.2% 1.4% -0.9% -4.3%

120






Equity Bank Ltd -8.5% -8.5% -0.3% -0.6% -0.9% -1.5% -2.1%


Fidelity Commercial Bank Ltd n/a n/a n/a n/a n/a n/a n/a

Guaranty Trust Bank Ltd -7.7% -4.2% 1.5% 0.3% 0.4% -1.5% n/a

Giro Commercial Bank Ltd -4.5% -6.5% 1.2% -1.1% n/a n/a n/a

Guardian Bank Ltd -8.5% -5.5% -3.0% -4.3% n/a n/a n/a

Gulf African Bank Ltd -8.5% -7.6% -6.8% 0.5% n/a n/a n/a

Habib Bank Ltd n/a n/a n/a n/a n/a n/a n/a

Habib Bank A.G. Zurich -8.5% n/a 2.5% -1.1% n/a n/a n/a

Housing Finance Co. of Kenya Ltd n/a -6.3% 2.7% 4.4% -2.3% n/a n/a

I&M Bank Ltd -8.3% n/a 0.2% 1.4% -4.1% -6.2% -8.7%


Jamii Bora Bank Ltd -8.5% n/a n/a 3.9% -2.7% n/a n/a

Kenya Commercial Bank Ltd -8.3% -7.7% -5.3% -6.3% n/a n/a n/a

K-Rep Bank Ltd -8.5% n/a n/a -3.9% -2.1% n/a n/a

Middle East Bank (K) Ltd 0.5% -4.9% 2.0% 0.5% 2.3% n/a -13.1%

National Bank of Kenya Ltd -3.6% n/a 7.1% 6.3% n/a n/a n/a

NIC Bank Ltd -6.5% -6.0% 0.7% -1.3% -0.7% -5.6% -7.8%

Oriental Commercial Bank Ltd -7.8% -5.3% 4.4% 0.2% 1.7% -11.5% n/a

CFC Stanbic Bank (K) Ltd -7.3% -0.6% -1.2% -0.3% n/a n/a n/a

Standard Chartered Bank (K) Ltd -3.5% -7.5% 0.3% 4.6% n/a n/a n/a

Trans - National Bank Ltd -8.5% -8.5% 2.2% 1.9% -3.7% n/a n/a

Victoria Commercial Bank Ltd -8.5% 1.4% 1.9% 1.8% n/a n/a n/a



121


Table 53: Average deposit spread of top 4 and the other banks in the corporate segment

Deposit Demand Saving 0-3 months 3-12 months 1-2 years 2-5 years Over 5 years

Top 4 -4.1% -5.8% -0.3% -0.6% -0.2% -4.3% -5.1%

Other banks -6.8% -6.1% 1.2% 0.9% -1.1% -2.6% -8.7%

Number of banks 28 20 26 28 15 10 6


SME segment

Table 54: Lending spread by bank as of December 2012 in the SME segment



Bank of Baroda (K) Ltd -0.7% 9.7% 8.6% 9.4% 8.8% 6.7%

Barclays Bank of Kenya Ltd 17.0% 15.2% 13.8% 13.3% 12.5% n/a



Credit Bank Ltd 11.4% 11.4% 10.7% 10.1% 9.3% 9.4%

Development Bank of Kenya Ltd n/a n/a n/a n/a n/a n/a




Equity Bank Ltd 13.5% 13.2% 11.9% 11.3% 10.5% 8.9%

Family Bank Ltd 10.7% n/a 9.2% 8.6% 7.8% n/a

Fidelity Commercial Bank Ltd 8.5% 12.2% 7.9% 8.3% 5.5% 3.9%



Guardian Bank Ltd 1.7% 1.4% 0.1% -0.5% -1.3% n/a


Habib Bank Ltd 9.2% 8.5% 5.1% 8.1% 5.9% n/a


122



Housing Finance Co. of Kenya Ltd n/a n/a n/a n/a n/a n/a

I&M Bank Ltd 12.0% 6.4% -1.1% 1.3% 1.0% 1.2%

Imperial Bank Ltd 12.5% 8.3% 6.9% 7.0% 8.1% n/a

Jamii Bora Bank Ltd 11.5% 11.2% -10.1% -10.7% 8.5% n/a


K-Rep Bank Ltd 10.5% n/a 0.1% n/a -0.9% n/a

Middle East Bank (K) Ltd n/a n/a n/a n/a n/a n/a


NIC Bank Ltd 15.5% 2.3% 9.0% 9.4% 8.6% 4.8%

Oriental Commercial Bank Ltd n/a 12.0% 7.3% 9.8% 9.4% 12.9%

CFC Stanbic Bank (K) Ltd 14.5% n/a n/a -1.7% 12.5% 5.9%


Trans - National Bank Ltd 12.5% 17.2% 15.9% 15.3% n/a n/a




Table 55: Average lending spread of top 4 and the other banks in the SME segment


Top 4 11.9% 8.0% 6.4% 7.6% 7.1% 4.7%

Other banks 11.3% 11.1% 8.1% 8.3% 8.1% 7.4%

Number of banks 25 23 25 27 26 20


Table 56: Deposit spread by bank as of December 2012 in the SME segment



Bank of Africa (K) Ltd -4.3% -8.3% 6.7% 3.7% 2.5% -10.7% 3.5%

Bank of Baroda (K) Ltd -7.4% -7.1% 1.4% 0.3% -3.6% -10.0% -13.1%

Barclays Bank of Kenya Ltd -8.5% -8.5% 3.2% 0.7% n/a n/a n/a

123






Credit Bank Ltd -8.5% -8.5% 3.2% 4.6% n/a n/a n/a

Development Bank of Kenya Ltd n/a n/a n/a n/a n/a n/a n/a

Diamond Trust Bank (K) Ltd -7.6% -7.4% 0.5% 0.7% -3.0% -1.8% n/a



Equity Bank Ltd -8.5% -8.5% -0.3% -0.6% -0.9% -1.5% -2.1%


Fidelity Commercial Bank Ltd -8.5% n/a 4.2% 3.9% 1.3% n/a n/a

Guaranty Trust Bank Ltd -8.0% -5.4% 1.1% -0.7% -1.7% n/a n/a

Giro Commercial Bank Ltd -7.5% -6.5% 2.2% -0.1% -4.7% n/a n/a

Guardian Bank Ltd -8.5% -5.5% -3.0% n/a n/a n/a n/a

Gulf African Bank Ltd -8.5% -7.6% n/a -1.8% n/a n/a n/a

Habib Bank Ltd -8.3% n/a -2.5% 2.9% n/a n/a n/a

Habib Bank A.G. Zurich -8.5% n/a 0.2% n/a n/a n/a n/a

Housing Finance Co. of Kenya Ltd n/a n/a n/a n/a n/a n/a n/a

I&M Bank Ltd -8.3% n/a 0.0% 3.2% 4.0% -6.7% -7.8%


Jamii Bora Bank Ltd n/a n/a n/a n/a n/a n/a n/a


K-Rep Bank Ltd -8.5% -6.5% -4.2% -5.4% n/a 15.7% n/a

Middle East Bank (K) Ltd 0.8% -7.6% 2.2% 1.7% n/a n/a n/a

National Bank of Kenya Ltd n/a n/a n/a n/a n/a n/a n/a

NIC Bank Ltd -7.9% -6.5% -0.8% -2.5% n/a -4.5% -7.1%

Oriental Commercial Bank Ltd n/a n/a n/a n/a n/a n/a n/a

CFC Stanbic Bank (K) Ltd n/a 0.3% -0.7% -2.3% -3.8% n/a n/a

Standard Chartered Bank (K) Ltd -6.2% -6.2% 1.4% 1.5% 5.5% 1.2% 1.9%

124




Trans - National Bank Ltd n/a n/a n/a n/a n/a n/a n/a

Victoria Commercial Bank Ltd -8.5% -3.3% -0.1% -3.4% n/a n/a n/a



Table 57: Average deposit spread of top 4 and the other banks in the SME segment

Deposit Saving 0-3 months 3-12 months 1-2 years 2-5 years Over 5 years Demand

Top 4 -7.7% -1.3% 1.8% 0.3% -2.2% -1.1% -8.2%

Other banks -6.1% 0.8% 0.0% -0.7% -1.9% -7.3% -7.5%

Number of banks 18 22 20 11 9 7 23


Personal segment

Table 58: Lending spread by bank as of December 2012 in the personal segment


Bank of Africa (K) Ltd 11.8% 9.0% 14.5% 12.2% 9.7% -0.7%





Credit Bank Ltd 15.6% 13.8% 13.3% 11.8% 7.3% 3.3%


Diamond Trust Bank (K) Ltd 8.4% n/a 7.9% 8.2% 6.7% 5.2%



Equity Bank Ltd 13.5% 13.2% 11.9% 11.3% 10.5% 8.9%

Family Bank Ltd 10.7% n/a 7.6% 7.0% 6.2% 4.6%


125



Guaranty Trust Bank Ltd 16.1% n/a 12.0% 11.5% 9.8% 7.2%

Giro Commercial Bank Ltd n/a n/a n/a n/a n/a n/a

Guardian Bank Ltd 1.7% 1.4% n/a -0.5% n/a n/a

Gulf African Bank Ltd n/a -4.8% 7.1% 2.9% 3.4% 1.1%

Habib Bank Ltd 11.5% 9.8% -2.4% 7.6% 6.3% -8.1%


Housing Finance Co. of Kenya Ltd n/a -5.3% 2.9% 5.3% 2.7% 2.2%

I&M Bank Ltd -5.0% 5.6% -0.6% 5.6% 0.7% -3.1%

Imperial Bank Ltd 12.5% 7.8% 5.3% 10.0% 8.7% 0.4%

Jamii Bora Bank Ltd 5.5% 5.2% 3.9% 11.3% 10.5% -5.1%


K-Rep Bank Ltd 5.1% 1.6% 0.0% -0.5% -1.3% n/a

Middle East Bank (K) Ltd 17.4% 15.5% 3.0% -0.1% 2.2% -4.1%


NIC Bank Ltd 13.1% 14.9% 4.6% 2.1% 1.7% 5.7%

Oriental Commercial Bank Ltd n/a 13.2% 10.9% 7.2% 4.0% -2.8%

CFC Stanbic Bank (K) Ltd 18.5% n/a n/a -4.7% 11.5% 7.9%






Table 59: Average lending spread of top 4 and the other banks in the personal segment


Top 4 10.0% 10.9% 9.5% 8.9% 7.8% 5.0%

Other banks 11.0% 8.7% 7.4% 7.2% 6.5% 2.4%

Number of banks 26 24 26 30 28 27


126


Table 60: Deposit spread by bank as of December 2012 in the personal segment



Bank of Africa (K) Ltd -3.8% -2.7% 8.8% 5.0% n/a 7.3% 4.0%

Bank of Baroda (K) Ltd -6.7% -6.8% 1.3% -3.7% -5.5% -7.6% -12.7%

Barclays Bank of Kenya Ltd -8.5% -0.3% 3.2% 0.7% -0.1% -3.3% n/a



Credit Bank Ltd -8.5% -8.5% 2.7% 1.2% n/a 1.7% n/a

Development Bank of Kenya Ltd -8.5% -6.0% 5.3% 3.6% -2.1% -5.5% n/a

Diamond Trust Bank (K) Ltd -8.2% -7.4% 0.5% 0.2% -0.5% -3.9% -3.3%


Ecobank Kenya Ltd -8.5% 3.0% 2.6% 1.3% 0.8% 0.0% -1.7%

Equity Bank Ltd -8.5% -8.0% -3.5% -4.5% -4.2% -3.8% -5.1%

Family Bank Ltd -8.5% -7.5% -3.9% -4.1% n/a n/a n/a

Fidelity Commercial Bank Ltd n/a -2.5% n/a n/a n/a n/a n/a

Guaranty Trust Bank Ltd -7.8% -5.5% 1.1% 0.4% -0.6% -0.8% n/a

Giro Commercial Bank Ltd n/a n/a n/a n/a n/a n/a n/a

Guardian Bank Ltd -8.5% -5.5% -3.0% -4.3% n/a n/a n/a

Gulf African Bank Ltd -8.5% -7.6% 0.8% 0.1% n/a n/a n/a

Habib Bank Ltd -8.5% n/a -1.5% -1.6% -1.8% n/a n/a

Habib Bank A.G. Zurich -8.5% -5.0% 1.5% 0.3% n/a n/a n/a

Housing Finance Co. of Kenya Ltd n/a -6.6% 0.9% 0.9% 2.7% 0.4% -1.7%

I&M Bank Ltd -8.3% -8.5% -0.3% 0.6% -3.0% -4.8% -9.5%


Jamii Bora Bank Ltd -8.5% -7.5% 0.2% -0.1% n/a -10.5% n/a


K-Rep Bank Ltd -8.5% -6.5% -3.4% -4.4% -4.2% n/a n/a

Middle East Bank (K) Ltd -1.2% -6.3% 1.0% 0.8% 4.4% n/a -13.1%

127




National Bank of Kenya Ltd n/a -8.0% 7.1% 6.3% n/a n/a n/a

NIC Bank Ltd -7.6% -7.0% -0.2% -3.7% -6.1% -5.8% -8.0%

Oriental Commercial Bank Ltd -6.4% -5.0% 3.0% 2.7% 1.4% -0.8% n/a

CFC Stanbic Bank (K) Ltd n/a -0.9% -3.1% -3.5% -3.2% -8.0% n/a

Standard Chartered Bank (K) Ltd n/a -7.2% 4.2% 0.9% 5.3% 1.7% n/a

Trans - National Bank Ltd -8.5% -8.5% -6.8% -6.1% -8.7% n/a n/a

Victoria Commercial Bank Ltd -5.4% -0.4% 1.0% -0.6% -9.7% n/a n/a



Table 61: Average deposit spread of top 4 and the other banks in the personal segment

Deposit Demand Saving 0-3 months 3-12 months 1-2 years 2-5 years Over 5 years

Top 4 -8.2% -6.0% 0.2% -0.7% -0.6% -2.7% -6.4%

Other banks -7.5% -5.5% 0.4% -0.1% -2.3% -2.7% -5.0%

Number of banks 24 28 28 27 18 16 9


128


APPENDIX F: PROFITABILITY BY BANK FOR 2013

Table 62: Profit ratios by bank for 2013

Ratio analysis Du-pont analysis

Bank NII margin NIR margin Cost-to-Income ROE Net profit margin Asset-turnover Financial leverage

Kenya Commercial Bank Ltd 9.1% 4.9% 53.6% 21.0% 32.8% 11.1% 5.74

Equity Bank Ltd 11.3% 6.9% 53.7% 22.2% 32.4% 13.7% 5.02

Standard Chartered Bank (K) Ltd 8.1% 4.3% 43.7% 23.4% 39.6% 10.3% 5.73

Barclays Bank of Kenya Ltd 9.9% 5.6% 60.3% 23.5% 27.0% 12.6% 6.88

CFC Stanbic Bank (K) Ltd 4.6% 7.4% 55.3% 22.2% 31.6% 8.9% 7.92

Diamond Trust Bank (K) Ltd 7.4% 2.3% 42.9% 21.8% 41.4% 8.2% 6.38

NIC Bank Ltd 6.1% 3.1% 43.2% 20.6% 40.1% 7.7% 6.68

I&M Bank Ltd 6.7% 3.0% 35.6% 21.4% 45.7% 8.2% 5.74

National Bank of Kenya Ltd 7.0% 2.4% 77.6% 10.8% 15.9% 7.8% 8.63

Citibank N.A. Kenya 6.2% 6.4% 33.7% 19.0% 40.2% 10.4% 4.53

Bank of Africa (K) Ltd 4.3% 2.4% 69.4% 11.9% 25.0% 4.7% 10.05

Bank of Baroda (K) Ltd 5.9% 0.6% 23.2% 24.5% 54.1% 6.2% 7.29

Housing Finance Co. of Kenya Ltd 5.7% 1.0% 58.3% 15.7% 32.0% 5.9% 8.39

Family Bank Ltd 11.3% 5.1% 71.3% 20.8% 20.0% 13.4% 7.76

Imperial Bank Ltd 10.2% 2.9% 48.9% 33.2% 35.8% 11.5% 8.05

Ecobank Kenya Ltd 2.8% 2.8% 175.2% -34.3% -73.4% 4.1% 11.36

Guaranty Trust Bank Ltd 4.7% 1.8% 71.3% 5.4% 23.0% 5.5% 4.34

Consolidated Bank of Kenya Ltd 4.7% 3.4% 117.6% -11.1% -13.6% 6.3% 12.99

Gulf African Bank Ltd 8.7% 2.4% 73.7% 9.8% 16.9% 9.3% 6.26

Development Bank of Kenya Ltd 3.5% 0.6% 61.3% 10.4% 30.8% 3.8% 8.94

Victoria Commercial Bank Ltd 6.3% 2.1% 42.6% 17.3% 40.9% 7.1% 5.93

Giro Commercial Bank Ltd 5.5% 1.0% 53.3% 18.2% 46.7% 5.9% 6.66

K - Rep Bank Ltd 11.4% 5.8% 72.8% 19.6% 19.0% 11.9% 8.63

Guardian Bank Ltd 5.8% 1.1% 56.7% 19.2% 32.0% 5.0% 11.99

Fidelity Commercial Bank Ltd 4.5% 3.2% 69.4% 15.1% 24.0% 6.9% 9.21

Habib Bank A.G. Zurich 6.3% 1.9% 39.3% 16.2% 38.2% 9.1% 4.64

Trans - National Bank Ltd 7.3% 3.0% 77.8% 7.5% 15.6% 8.6% 5.55

Habib Bank Ltd 7.9% 1.2% 36.4% 17.8% 38.5% 6.7% 6.89

Credit Bank Ltd 7.6% 2.3% 85.2% 7.5% 14.8% 2.0% 25.67

129




Jamii Bora Bank Ltd 7.0% 6.6% 88.5% 3.3% 11.5% 8.5% 3.34

Oriental Commercial Bank Ltd 5.6% 1.5% 65.9% 9.8% 34.1% 6.0% 4.79

Middle East Bank (K) Ltd 5.0% 1.8% 79.1% 6.4% 20.9% 5.8% 5.22

Dubai Bank Ltd 5.6% 13.1% 95.9% 1.1% 2.9% 10.0% 3.82


APPENDIX G: PROFITABILITY BY BANK FOR 2012

Table 63: Profit ratios by bank for 2012



Kenya Commercial Bank Ltd 8.7% 4.9% 57.1% 20.7% 30.6% 10.97% 6.17

Equity Bank Ltd 11.5% 6.8% 51.6% 24.8% 33.9% 13.84% 5.29

Standard Chartered Bank (K) Ltd 7.8% 4.6% 44.8% 24.9% 38.9% 10.36% 6.18

Barclays Bank of Kenya Ltd 10.9% 6.6% 52.5% 30.6% 32.0% 13.92% 6.86

CFC Stanbic Bank (K) Ltd 5.1% 7.1% 67.2% 15.8% 21.1% 9.84% 7.61

Diamond Trust Bank (K) Ltd 7.6% 2.5% 46.0% 20.6% 35.5% 8.82% 6.58

NIC Bank Ltd 5.0% 3.2% 42.4% 19.5% 40.3% 6.98% 6.92

I&M Bank Ltd 5.8% 3.1% 34.9% 20.1% 46.2% 7.58% 5.74

National Bank of Kenya Ltd 8.2% 2.8% 82.9% 7.3% 11.8% 8.92% 6.97

Citibank N.A. Kenya 8.0% 8.4% 23.9% 25.7% 46.9% 13.43% 4.08

Bank of Africa (K) Ltd 3.6% 1.7% 73.3% 9.3% 19.7% 4.04% 11.73

Bank of Baroda (K) Ltd 4.7% 0.7% 32.2% 19.9% 47.8% 5.14% 8.10

Housing Finance Co. of Kenya Ltd 4.9% 1.0% 60.6% 12.5% 28.9% 5.25% 8.24

Family Bank Ltd 11.5% 5.5% 82.1% 11.7% 13.1% 13.20% 6.78

Imperial Bank Ltd 9.2% 3.7% 51.7% 30.2% 33.9% 10.99% 8.11

Ecobank Kenya Ltd -2.2% 3.6% 1377.2% -287.7% -1239.2% 0.53% 43.93

Guaranty Trust Bank Ltd 4.8% 2.8% 70.3% 13.5% 20.8% 6.73% 9.63

Consolidated Bank of Kenya Ltd 6.0% 3.6% 90.7% 7.0% 7.2% 7.69% 12.54

Gulf African Bank Ltd 9.4% 2.5% 73.7% 15.2% 16.3% 10.26% 9.11

Development Bank of Kenya Ltd 2.0% 0.9% 79.3% 4.7% 22.2% 2.46% 8.52

130




Victoria Commercial Bank Ltd 7.0% 1.6% 42.2% 15.7% 40.6% 7.47% 5.17

Giro Commercial Bank Ltd 4.3% 1.7% 69.0% 11.8% 31.4% 5.26% 7.14

K - Rep Bank Ltd 14.6% 5.8% 81.4% 14.2% 13.0% 14.05% 7.75

Guardian Bank Ltd 4.4% 1.3% 65.1% 13.8% 25.9% 3.92% 13.59

Fidelity Commercial Bank Ltd 2.6% 3.6% 73.4% 10.2% 18.5% 5.48% 10.03

Habib Bank A.G. Zurich 6.7% 2.2% 41.7% 17.4% 36.4% 9.98% 4.79

Trans - National Bank Ltd 6.5% 5.7% 68.9% 12.0% 23.3% 10.00% 5.15

Habib Bank Ltd 8.4% 1.2% 35.2% 20.6% 40.6% 6.86% 7.39

Credit Bank Ltd 6.7% 2.6% 83.6% 7.4% 16.6% 2.30% 19.43

Jamii Bora Bank Ltd 8.6% 10.2% 80.8% 3.1% 19.8% 8.59% 1.82

Oriental Commercial Bank Ltd 4.0% 2.0% 74.6% 6.1% 25.5% 5.03% 4.75

Middle East Bank (K) Ltd 3.3% 1.8% 95.9% 2.6% 10.8% 4.31% 5.55

Dubai Bank Ltd 11.3% 16.1% 81.2% 5.9% 13.2% 16.05% 2.80


131

Legally Privileged and Confidential Draft Version

APPENDIX H: CALCULATION OF COST OF EQUITY

1. This appendix shows the methodology used by us to calculate the country-wise cost of

equity for banks. The cost of equity is the return that the shareholders of a bank would

expect. This depends on the risk-free returns that can be made by investing in the

country, and the level of risk perceived by the shareholders in investing in a bank.

2. We use a standard model called as the capital asset pricing model (CAPM) used to

calculate the cost of equity. This states that the cost of equity, E(Ri) is:

Where, Rf is the risk free rate, Bi is the equity beta measuring the relative risk of a bank

vis-à-vis the equity market in general, E(Rm) is the equity risk premium, which is the

general risk premium of investing in equity in the country.

3. We describe the calculation for each of these elements:

3.1. Risk free rate. The risk free rate is calculated in two steps. First we calculate the

risk-free rate for the United States (US) by taking the annual real rate of return for

bonds between 1900-2014 as 1.9 per cent121

, and the long-term average inflation

rate in the US as 3.22 per cent122

. Based on this, the nominal risk free rate in the

US is 5.18 per cent. Second, the risk free rate for each country is calculated by

summing the risk-free rate for the US with the rating based spread relative to the

US, as given by Damodaran.123

For example, the rating based spread for Kenya is

4.5 per cent, which implies that the risk-free rate for Kenya is 9.7 per cent.

3.2. Equity risk premium. The equity risk premium for each country is calculated

similarly in two steps. First, we take the equity premium relative to bonds for the US

in the period 1900-2013 as 4.5 per cent.124

Second, we add the country risk

premium as given by Damodraran. For example, the country risk premium

estimated by Damodaran for Kenya is 6.8 per cent. Therefore, the equity risk

premium for Kenya is 11.3 per cent.

3.3. Equity beta. The final element of equity beta is calculated as an average of 721

banks across the globe. This beta is 0.58. This beta is assumed to be the same for

all countries.

4. Using the elements above, the cost of equity is calculated for each country. For Kenya, it

is calculated as 9.7% + 11.3%*0.58. This comes to 16.2%.

121

https://publications.credit-suisse.com/tasks/render/file/?fileID=0E0A3525-EA60-2750-71CE20B5D14A7818 122

http://inflationdata.com/Inflation/Inflation_Rate/Long_Term_Inflation.asp 123

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html 124

https://publications.credit-suisse.com/tasks/render/file/?fileID=0E0A3525-EA60-2750-71CE20B5D14A7818


http://inflationdata.com/Inflation/Inflation_Rate/Long_Term_Inflation.asp

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html


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Kenyan banking sector study Phase I · uncompetitive market structure creates market power with the possibility that one or more firms in the market have the ability to raise prices